Fri Oct 24, 2008 1:09pm EDT By Patrick Rucker WASHINGTON (Reuters) - Sales of previously owned U.S. homes rose 5.5 percent last month, the biggest gain since July 2003, and the inventory of unsold homes fell, a hopeful sign for a housing market mired in a long slump. The National Association of Realtors said on Friday that sales of existing homes rose to a 5.18 million-unit annual rate from the 4.91 million unit pace set in August. Economists had expected sales to rise to only a 4.93 million unit rate. It was the first time the sales pace had risen above its year ago level in nearly three years, a sign the market could be stabilizing. The surprisingly large jump in sales pushed the inventory of unsold homes down by 1.6 percent to 4.27 million, or a 9.9 months' supply at the current pace, the lowest since February. "We're not out of the woods yet by any means when it comes to falling house prices and our fundamental problem of an oversupply of homes, but we're getting near to the bottom every day," said White House spokeswoman Dana Perino. Home prices, however, showed no signs of escaping their long, deep slide and economists said the number of homes on the market would likely have to fall further before they do. The median national home price declined 9 percent from a year ago to $191,600, the lowest level since April 2004. "As the median price continues to decline, seeking out that new equilibrium level, demand is -- slowly and hesitantly -- moving back into the market," said Lindsey Piegza, an economic analyst at FTN Financial in New York. A Reuters poll taken October 21-24 found economists expect prices to continue to fall through next year. The median forecast from the survey was for a 15 percent drop this year and a 6.4 percent fall in 2009. Economists expect prices to turn up in 2010, but by a meager 1 percent. 'VULTURE INVESTORS' Rising U.S. mortgage defaults have sent credit markets into a tailspin, threatening economies worldwide. A majority of economists polled said finding

a floor for house prices is an essential condition for ending the financial crisis. In order for prices to recover, the glut of unsold homes needs to be whittled down further, analysts said. "Most, if not all, the rise in sales is due to vulture investors buying cheap foreclosed homes, but all sales reduce inventory," said Ian Shepherdson, the chief U.S. economist at High Frequency Economics in Valhalla, New York. "If this continues, people will stop expecting further price falls and activity will start to recover." Lawrence Yun, the chief economist for the Realtors' trade group, also pointed to a rise in foreclosure and other 'distress' sales in regions hard-hit by the housing downturn. "In some regions, the lower prices are seeing buyers return to the marketplace," he said. "This was a nice jump and hopefully this trend can continue because the first step to stabilizing the market is an increase in home sales." Sales jumped 16.8 percent in the West, while rising 4.4 percent in the Midwest and 2.2 percent in the South. In the Northeast, sales fell 1.2 percent. Sales of single-family homes, which represent the lion's share of the market, rose 6.2 percent. Sales of condominiums held steady. "We're still struggling with falling home prices and we will for a while, but we're forming a bottom here," said Bob Walters, chief economist at Quicken Loans in Livonia, Michigan. CLICK HERE FOR LINK TO REUTERS ARTICLE (Additional reporting by Pedro Nicolaci da DaCosta, Ellen Freilich and Nick Olivari in New York; Polling by Bangalore polling unit; Editing by Andrea Ricci) © Thomson Reuters 2008. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world. Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.