Despite 46k of downward revisions in the previous two months, which pushed the pace of new home sales lower than expected even with a 2.4% monthly rebound, economists said the Department of Commerce's July report was positive as the level of inventories saw a notable reduction.

June's pace of sales was revised down to 503k, down from an originally reported 530k. Based on that data, economists were expecting the July number to fall 0.9% to 525k. Instead, it moved up 2.4% to 515k.

Despite the monthly advance, the pace of sales is 35.3% below the July 2007 estimate of 796k.

Dave Resler, chief economist at Nomura Securities, said he doesn't put a lot of stock in the revisions, noting that the downward revisions in this month were comparable to the upward revisions seen in the last report.

Resler said the data add to the evidence that the U.S. housing sector is in the bottoming process. He said it is encouraging that sales have yet to fall below a pace of 500k, adding that for the exception of the boost in April, the range of sales has been quite narrow in the past five months.

Eric Lascelles, chief economics and rates strategist at TD Securities, said "there was an undeniably cheery quality to the report," as the overhang of supply fell to a 10.1-month supply, down from June's upwardly revised 10.7-month supply and marking a six-month low.

Lascelles said the report adds to the slew of data suggesting the deterioration in the U.S. housing market is slowing.

Looking at the raw number of inventories rather than the months' supply, Resler said the level of overhang is at its lowest level since October 2004. In July, there were 416k homes for sale, down from 439k in June.

"Months' supply doesn't tell you anything when the sales pace is low," he said. If sales were to advance even just to their April levels, the months' supply would decrease significantly, he added, calling this report an encouraging sign for home builders even if it's not enough to spur production just yet.

Ian Shepherdson, chief U.S. economist at HFE, added: "[W]e still can't say with any confidence that sales have hit bottom, though the rate of decline has certainly slowed."

The median sale price of new houses sold in July was $230,700, up from June's revised median of $230,100.

On the trading floor reaction, Sireen Hajj at Calyon Cr�dit Agricole CIB said bonds traded lower following the release, which simultaneously saw the Conference Board's consumer confidence report rise more than anticipated.

The new home sales report follows Monday's existing home sales report from the National Association of Realtors, which rebounded by 3.1% - more than expected - to reach an annualized pace of 5.00 million sales.

Resler said both existing and new homes sales need to be looked at for signs of when the housing market will improve. He said economists look to the housing starts data to determine when the housing sector will stop being a drag on GDP growth.

Earlier on Tuesday, quarterly results were released from the S&P Case-Shiller home price index, which reported an annual decline of 15.38% in the second quarter. Also, the OFHEO index of home prices for June reported no change in prices, following May's revised 0.4% pullback.

By Patrick McGee and edited by Nancy Girgis