Existing home sales rose more than expected in August to their highest level in five months as falling prices and low interest rates drew more buyers into a still moribund market.

The data did little to change the view that housing, hobbled by a burst bubble which triggered a major recession, will not help the economy much anytime soon.

Sales climbed 7.7 percent from the previous month to an annual rate of 5.03 million units, the National Association of Realtors said on Wednesday. The median price was 5.1 percent lower than a year earlier.

This housing market is still very distressed, said Michael Hanson, an economist at Bank of America Merrill Lynch in New York.

We have to get a lot of good news for a meaningful turnaround in the housing market, he said.

The outlook for housing prices remains grim. A survey by MacroMarkets LLC showed economists expect home prices to rise just 1.1 percent a year through 2015.

That is less than a third of the annual pace clocked in the 13 years that preceded the housing bubble, the survey found. Falling prices can make housing look like a poor investment for many Americans.

A separate report showed applications for mortgages edged up last week on higher refinancing activity, but were held back by a lack of demand for purchases, according to the Mortgage Bankers Association.

DISTRESSED SALES

Existing home sales have trended lower in 2011 and prices are still weakening. One factor keeping prices low is the high rate of distressed sales which include those forced by foreclosures.

Distressed sales accounted for 31 percent of August transactions, up from 29 percent a month earlier.

In an attempt to breathe new life into the sector and the wider economy, the U.S. Federal Reserve is keeping interest rates low.

U.S. stocks drifted lower as investors awaited the Fed's post-meeting statement.

The Fed is expected to hold interest rates near zero following a two-day policy review that concludes on Wednesday, and many expect policymakers will unveil new measures to ease credit further. The Fed's policy has helped keep mortgage rates historically low.

At the same time, some other props for the sector are set to fall away. At the end of this month, the size of the loans federal housing agencies can purchase will fall, and next year government-controlled mortgage companies Fannie Mae and Freddie Mac will begin to raise fees on the loans they purchase.

NAR economist Jed Smith was nevertheless upbeat that the prices could stabilize soon because he said inventories would likely decline over the winter.

(That) would be very conducive to definitive price stabilization, he told reporters.

Total housing inventory fell 3.0 percent to 3.58 million existing homes available for sale, equivalent to an 8 1/2 month supply, the NAR said.

The NAR said the increase in sales came despite some disruptions from Hurricane Irene, which battered much of the East Coast at the end of the month.

Economists polled by Reuters had expected sales to rise 1.4 percent to a 4.71-million-unit pace. Compared to August 2010, sales were 18.6 percent higher.

The NAR's estimate for the pace of existing home sales during July was unchanged.

(Additional reporting by Richard Leong and Leah Schnurr in New York; Editing by James Dalgleish and Andrew Hay)

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