Sales of previously owned homes in the U.S. rose 3.1 percent in July. Nonetheless, the increase masked continued weakness in the housing market.

Resales increased more than forecast to an annual rate of 5 million, with at least one-third of the purchases coming from foreclosed properties, the National Association of Realtors said today in Washington. At the same time, the median price dropped 7.1 percent from July 2007, and the number of homes for sale jumped to a record.

Sales averaged a pace of 4.95 million the past three months, the same rate as the previous period, indicating that purchases may have touched a bottom. At the same time, the glut of houses for sale means property values will probably keep dropping, putting pressure on household wealth and consumer spending.

“Existing home sales have likely stabilized,” Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York, said in an interview with Bloomberg Television. “In terms of demand, we’re probably close to the bottom. In terms of prices, we don’t think we’ll see a bottom until the end of next year.”

Treasuries, which had rallied earlier in the day, remained higher after the report. Benchmark 10-year notes yielded 3.78 percent at 11:14 a.m. in New York, from 3.87 percent at last week’s close. The Standard & Poor’s Supercomposite Homebuilding Index of stocks was down 1.1 percent at 285.89.

Economists’ Forecasts

Resales were forecast to rise to a 4.91 million annual rate, according to the median estimate of 75 economists. Projections ranged from 4.69 million to 5 million. July’s sales rate was the highest since February.

Sales were down 13 percent compared with a year earlier. Resales totaled 5.65 million in 2007.

The increase in sales wasn’t enough to keep up with the surge in properties coming into the market as foreclosures mount. There were a record 4.67 million unsold houses and condos on the market in July, representing 11.2 month’s supply at the current sales pace, matching the highest ever. The group has said a five to six months’ supply is consistent with a stable market.

The jump in inventory was driven by an increase in the supply of condos as projects started one or two years ago came on the market, the Realtors group said.

The median price of an existing home fell to $212,400 from $228,600 in July 2007.

“We are in a very tight credit-availability condition,” Lawrence Yun, NAR’s chief economist, said in a press conference. “Inventories continue to remain very high.” One-third to 40 percent of total sales last month reflected distressed properties, which include foreclosures, he said.

Market Composition

Resales account for about 85 percent of the market, while purchases of new homes make up the rest. Sales of existing homes are compiled from contract closings and may reflect contracts signed one or two months earlier.

For that reason, economists consider new-home sales, which are recorded when a contract is signed, a more timely barometer of the market. A report tomorrow from the Commerce Department may show new-home sales fell in July for the third consecutive month, according to the Bloomberg survey median.

Today’s report showed resales of single-family homes increased 3.1 percent to a 4.39 million annual pace. Sales of condos and co-ops climbed 3.4 percent to a 610,000 rate, the most since November.

Purchases increased in three of four regions, led by a 9.7 percent jump in the West. Sales fell 0.5 percent in the South.

Tight credit conditions and ongoing declines in residential construction will weigh on economic growth in coming months, Federal Reserve policy makers said at their Aug. 5 meeting. The Fed’s quarterly survey of bank loan officers showed 75 percent had made it tougher for prime borrowers to get a mortgage, more than in the April survey.

`Worry a Lot’

“I worry a lot about what’s happening in housing,” Martin Feldstein, a member of the committee that charts American business cycles. “The number of negative-equity homes is exploding. Housing prices will continue to go down, driven by the large oversupply of houses and the increasing number of foreclosures.”

The number of unsold previously owned homes has piled up as some owners resist lowering prices and banks repossess more properties.

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