Economists say the larger-than-expected rise in July existing home sales doesn't necessarily point towards stabilization, since more than a third of the sales are related to foreclosures. They also note that a record high inventory level will put downward pressure on prices going forward.

The annualized pace of sales in the National Association of Realtors index rose 3.1% to 5.00 million units in July, following June's revised sales pace of 4.85 million. Since July 2007, existing home sales have declined by 13.2%.

Ian Shepherdson, chief U.S. economist at HFE, said it's "hard to avoid the conclusion that sales have bottomed out," but he said it's likely that sales have increased from homes in foreclosure rather than a pickup in the regular sales market.

"Any real improvement is still a long way off," he added.

Total housing inventories rose to a record-high 11.2-month supply in July, up from the 11.1-month supply in June.

Lawrence Yun, NAR chief economist, said home prices in some regions may be at a bottom. "Sales have picked up significantly in several Florida and California markets. Home prices generally follow sales trends after a few months of lag time," he said.

Other economists were less optimistic, however.

Paul Ashworth, senior U.S. economist at Capital Economics, said that "while a stabilization in sales might normally be considered a positive development for home values, the surge in distressed sales suggests that the downward pressure on house prices is only getting stronger."

He noted that industry estimates suggest up to 40% of current sales are related to homes in foreclosure.

John Ryding and Conrad DeQuadros from RDQ added, "Over the next few quarters, foreclosure sales are likely to comprise an increasing proportion of home sales, which should put further downward pressure on home prices."

Single-family unit sales rose 3.1% to a pace of 4.39 million, up from a rate of 4.26 million in the previous month. The supply of single-family homes dropped to 10.6 months from 11.0 months in the prior report.

On the trading floor take, Sirren Hajj of Calyon Cr'dit Agricole CIB said the market reaction was muted.

"Fundamentals in the housing market remain weak as oversupply, falling prices, and tighter lending standards continue to weigh on home sales," he added, saying stabilization won't take place "until well into 2009."

The national median existing home price fell to $212,400 in July, down from the June figure of $215,100 and marking a 7.1% year-over-year decline.

According to Freddie Mac, the national average for a 30-year fixed-rate mortgage rose to 6.43% in July from 6.32% in June; the rate was 6.70% in July 2007.

Interest rates are often considered the biggest factor in the economy to influence existing home sales. It's said that a percentage point increase in mortgage rates can reduce the pace of sales by 250,000.

Regionally, existing home sales moved up in three of the four regions. Sales in the West jumped 9.7% in July, while sales in the Northeast rose 5.9% to an annual pace of 900,000. Sales in the Midwest increased 0.9% to an annual rate of 1.12 million, while in the South, existing home sales slipped 0.5% to an annual pace of 1.85 million.

By Patrick McGee and edited by Stephen Huebl