WASHINGTON (Reuters) - Home resales rose in August to their highest rate in more than two years and groundbreaking on new homes also climbed, signs that a budding housing market recovery is gaining traction.

The National Association of Realtors said on Wednesday that existing home sales increased 7.8 percent last month to an annual rate of 4.82 million units.

That was well above economists' expectations and the fastest rate since May 2010 when activity was being supported by a home-buyer tax credit.

The U.S. economy has grown at a lackluster pace this year and has struggled to create jobs, but the housing sector is a relative bright spot for the first time since the 2007-09 recession.

"Housing is clearly in recovery mode," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.

Prices for previously owned homes also rose when compared with a year earlier, a factor that could spur consumer spending by helping homeowners feel more confident about their finances. The median price for a home resale rose 9.5 percent to $187,400, the NAR said.

The U.S. Federal Reserve is trying to help housing build more momentum, and last week launched a program to buy mortgage-backed securities, which could push interest rates lower for both new and refinanced mortgages.

STARTS REBOUND

The data helped push U.S. stocks higher, with the PHLX housing sector index up 2.3 percent. Prices for U.S. government debt rose as early worries among traders that the Fed's new stimulus could fuel inflation receded.

Many economists expect construction of new homes will contribute to economic growth this year for the first time since 2005, and a separate report from the Commerce Department buttressed that view.

U.S. housing starts rose 2.3 percent last month to an annual rate of 750,000 units, the Commerce Department said.

"Today's data are another indication of improvement in the U.S. housing market," said Andrew Grantham an economist at CIBC World Markets in Toronto.

Still, starts fell short of expectations as groundbreaking on multifamily home projects fell and July's pace was revised downward. At the same time, building permits slipped 1 percent.

Home sales have been creeping up and the steep decline in prices since 2006 appears to have bottomed. That has helped home-builder sentiment, which this month touched a six-year high.

The NAR said the share of so-called distressed sales - which include foreclosures and sales where the owner owes more on a home than it is worth - fell last month, a factor that likely contributed to the rise in prices.

Distressed sales tend to go with a heavy discount, and the share of resales in those conditions dropped to 22 percent last month, down from 24 percent in July. In August 2011 the distressed sales rate was 31 percent.

The nation's inventory of existing homes - those for sale on the market - rose 2.9 percent during the month to 2.47 million. But at August's sales pace, that would supply the market for only 6.1 months, down from 6.4 months in July.

A MISSING PISTON

Last Thursday, the Fed announced it would buy $40 billion in mortgage-backed securities per month until the outlook for employment improved significantly. The central bank's chairman, Ben Bernanke, said officials hoped the purchases would help unstick a housing sector that he called "a missing piston" in the U.S. recovery.

However, analysts believe the purchases, the third round of so-called quantitative easing, or QE3 as it is known on Wall Street, will only lend limited support to the housing market.

Part of this is because lending standards for mortgages have tightened significantly since before the recession.

"While rates are at historical lows, borrowers still have a very difficult time accessing the mortgage markets," said John Tashjian, principal at Centurion Real Estate Partners in New York.

Also, while interest rates on mortgages are at record lows, yields on MBS have dipped more sharply. That suggests lenders are not fully passing on their cheaper borrowing costs to home buyers, which could make it harder for the Fed's policy to help the housing market.

The spread between the yields on current coupon 30-year Fannie Mae MBS and 30-year mortgage rates measured by the Mortgage Bankers Association has risen to its widest in at least four years.

Last week, fixed 30-year mortgage rates fell 3 basis points last week to average 3.72 percent, the MBA said in a separate report.

(Editing by Neil Stempleman)

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