U.S. existing home sales surged 7.8 percent to the highest level in over two years and construction activity showed modest improvements in August, according to reports released Wednesday, suggesting sustained improvement in a sector still enduring the aftershocks of the 2008 financial collapse.

Sales of existing homes increased to an annual pace of 4.82 million in August, up from 4.47 million in July, according to the National Association of Realtors. It was much higher than the 4.55 million units forecast by economists polled by Reuters and the highest level since May 2010, when a first-time homebuyer tax credit boosted activity. The median existing home price rose to $187,400, up 9 percent from the prior year.

"The housing market is steadily recovering with consistent increases in both home sales and median prices. More buyers are taking advantage of excellent housing affordability conditions," said Lawrence Yun, NAR's chief economist, in a statement.

The NAR credited low mortgage rates and cheaper home prices for encouraging more people to buy homes. The Federal Reserve's decision last week to buy $40 billion in mortgage securities each month is expected to lower interest rates further, but lending standards remain an obstacle for those with weaker credit scores.

Inventory increased 2.9 percent to 2.47 million units at the end of August, slightly more than a six-month supply at the current pace of sales. Distressed property sales, including foreclosures and short sales, account for 22 percent of August sales, down from 24 percent in the prior month and 31 percent in August 2011.

Separately, housing construction starts rose 2.3 percent to 750,000 in August, up from a revised 733,000 in July, according to the Commerce Department. The result was below the 765,000 units forecast by economists polled by Reuters.

Building permits fell 1 percent to a 803,000 units from 811,000 units in July, which was the highest level in four years. The result was better than the 796,000 units projected by analysts.