WRAPUP 3-US pending home sales rise, but recovery far away
* Pending home sales rise 8.2 pct in May
* Demand for home purchase loans drops to 4-month low
* Oversupply of homes hampering recovery (Adds details, Obama comments on economy)
WASHINGTON, June 29 (Reuters) - Pending sales of existing U.S. homes rebounded from a seven-month low in May but demand for mortgages sank last week and the market is still struggling under the weight of a glut of unsold properties.
The National Association of Realtors said on Wednesday its Pending Home Sales Index increased 8.2 percent to 88.8. Pending homes sales lead actual sales of homes by a month or two.
The rise in contracts was merely a correction after an 11.3 percent fall in April and the market will continue to bounce along the bottom, economists said.
That subdued outlook for a sector, which is helping to constrain economic growth, was illustrated by a Mortgage Bankers Association report showing applications for loans to buy homes dropped 3 percent last week to a four-month low.
"Although today's number could bring some cheer to investors who are on the prowl for good news, the fact of the matter is that the housing sector is still a long way from a meaningful recovery," said Peter Buchanan, a senior economist at CIBC World Markets in Toronto.
While the rise in contracts suggested a bounce back in home sales in June, economists cautioned against expecting a strong increase as many planned deals get canceled.
Demand for loans to buy a home has been modest so far this month. Existing home sales fell 3.8 percent in May.
INSTANT VIEW - US pending home sales [ID:nN1E75S0JN]
Graphic - pending home sales: r.reuters.com/fun42s
WEAK HOUSING HURTING ECONOMY
Investors on Wall Street cheered the rise in pending home sales, which beat economists' expectations for a 3.8 percent gain, and bought stocks for a third straight day.
Sentiment was also buoyed by the Greek parliament's approval of austerity measures, an important step in the country's bid to gain access to international funding to avoid default. Prices for U.S. government debt fell and the dollar was down against a basket of currencies.
The housing market is grappling with an oversupply of homes, which is keeping prices subdued, and economists do not see a recovery any time soon.
According to the NAR, there were 3.72 million used homes on the market in May, excluding the so-called shadow inventory of homes which are at risk of being foreclosed upon or have been seized by lenders.
The housing market collapse helped to push the U.S. economy into its worst recession since the 1930s. The sluggish economic recovery has been marked by a 9.1 percent unemployment rate and on Wednesday, President Barack Obama called for new job creation measures.
"It makes perfect sense for us to take a look at, can we extend the payroll tax, for example, an additional year, and other tax breaks for business investment that could make a big difference in terms of creating more jobs right now," Obama told a White House news conference. [ID:nN1E75S0UN]
Economists are cautiously optimistic that home sales will gradually improve later this year and chip away at the huge inventory. Data on Tuesday showed a moderation in the pace of decline in single-family home prices in April.
"What is emerging is that we have hit some bottom level of activity and that's a good thing," said Steve Blitz, a senior economist at ITG Investment Research in New York.
"When you take that and marry it to the fact that you are not getting much new home construction, it means you are selling out of inventory of existing homes ... and you start to get new home construction. The industry is slowly moving in the right direction."
A slightly hopeful note was also sounded by KB Home, the fifth-biggest U.S. homebuilder, which said net orders for new homes fell 11 percent in the second quarter, compared with the same period of 2010 but jumped 53 percent from the first three months of the year.
"Although a broad-based housing recovery remains stalled, it appears that the worst of the crisis is behind the homebuilding industry as select markets for new homes are showing signs of stability," said chief executive officer Jeffrey Mezger. (Editing by Andrea Ricci)