* Home resales up 2.7 pct in Jan on distressed sales
* Supply at 7.6 months, median price lowest since 2002
* Home loan applications rise in latest week (Recasts lead, updates markets to close)
By Lucia Mutikani
WASHINGTON, Feb 23 (Reuters) - Surging sales of distressed properties pushed prices for previously owned U.S. homes to a near nine-year low in January, even as they helped to lift overall sales to an eight-month high.
The National Association of Realtors said on Wednesday existing homes sales climbed 2.7 percent to an annual rate of 5.36 million units, marking the third straight month of gains. Economists had expected a fall to a 5.24 million-unit pace.
But foreclosures and short sales, which typically occur below market value, accounted for 37 percent of the transactions and suggested further price declines ahead. The median home price fell 3.7 percent from a year ago to $158,800, the lowest since April 2002.
"What this shows is that there will be an ongoing adjustment to prices to the downside. Housing fundamentals are still weak," said Neil Dutta, an economist at Bank of America Merrill Lynch in New York.
Data on Tuesday showed prices for single-family homes tracked by Standard & Poor's/Case Shiller fell for a sixth straight month in December, and some economists warned they could fall another 25 percent.
U.S. financial markets ignored the data as investors kept a wary eye on the unrest in Libya, which drove U.S. crude for April delivery CLc1 to a 28-month high of $100 a barrel, before settling at $98.10.
U.S. stocks .SPX fell for a second day, while the dollar weakened against a basket of currencies .DXY.
An overhang of foreclosed properties is weighing down the housing market even as the broader economy has entered a sustainable growth path. Housing was at the core of the worst recession since the 1930s.
Sales rose even as demand for home loans slumped in January. The NAR has been accused of overstating the rate of home sales by as much as 20 percent.
While acknowledging the trade group might have overcounted sales, NAR chief economist Lawrence Yun told reporters: "I would be highly surprised if it was 20 percent."
The NAR is reviewing its data and will release benchmark revisions later this year. Yun said the last benchmark revisions in 2000 showed an overcounting of about 13 percent.
INSTANTVIEW-US existing home sales [ID:nN23147045]
Graphic-Existing home sales: r.reuters.com/tut28r
Graphic-US mortgages: Mortgage applications rose last week
CASH TRANSACTIONS ON THE RISE
Despite the weak housing market, luxury homebuilder Toll Brothers (TOL.N) reported a surprise quarterly profit, with average home prices rising 7 percent to $586,000. However, the company expects a decline to a range of $540,000 to $565,000 for the rest of the year. For details see [ID:nSGE71M070].
The share of distressed sales last month, at 37 percent, was the highest in a year. All-cash purchases made up 32 percent of transactions compared with 29 percent in December. Analysts said this partly explained why home resales had surprised on the upside, when home loan applications had dropped sharply.
"So far in February, mortgage applications have fallen, which could be reflected in resales numbers in the next report," said Yelena Shulyatyeva, an economist at BNP Paribas in New York.
Applications for home loans rebounded last week as buyers rushed to take advantage of a slide in mortgage rates in the wake of the growing unrest in the Middle East, the Mortgage Bankers Association said. [ID:nEFE7DA005]
The existing home sales report also showed a shift in the housing market becoming more pronounced, with growth in multifamily units outpacing single-family homes.
Demand for rental apartments is on the increase, boosting sales of multifamily dwellings, as families lose their homes to foreclosure and prospective homeowners shy away from owning a property because of falling values.
Paul Dales, a senior U.S. economist at Capital Economics, estimates there is an oversupply of 850,000 homes on the market, with another 4.5 million in the foreclosure pipeline.
At January's sales pace, the supply of existing homes on the market fell to 7.6 months' worth, the lowest since December 2009, down from 8.2 months' worth in December.
A supply of between six and seven months is generally considered as ideal, with higher readings pointing to lower house prices.
"While the acceleration in demand is encouraging, prices are likely to remain weak as the pipeline of foreclosures slowly makes its way onto the market," said Omair Sharif, an economist at RBS in Stamford, Connecticut. (Editing by James Dalgleish)