Home resales volumes bounced back in March, a hopeful sign for recovery in the housing market, but prices continued to decline.

The housing market is struggling to find its footing as a wave of foreclosed properties keeps supply up but prices down.

The housing sector led the economy into its worst recession since the 1930s in 2007-2008 and is now lagging recovery in the broader economy.

Existing home sales in March rose 3.7 percent from February to an annual rate of 5.10 million units, the National Association of Realtors said on Wednesday. Economists had expected a smaller increase to a 5.0 million-unit pace.

But the median home price fell 5.9 percent in March from a year earlier to $159,600.

The underlying trend for existing home sales is improving, but only at a gradual pace, said Michael Gapen, an economist at Barclays Capital in New York. Demand should gradually firm as labor market conditions continue to improve.

With U.S. unemployment beginning to fall and significant job growth seen in February and March, economists are cautiously optimistic home sales will continue to rise as the year progresses, putting a floor under prices.

Analysts also cited a jump last week in demand for home loans as boding well for the housing recovery. The Mortgage Bankers Association said on Wednesday that its purchase loan index rose 10 percent to its highest since early December.

The housing market in terms of demand has bottomed. We have some reason for modest optimism as we go through 2011, said Peter Muoio, a senior principal at real estate research firm Maximus Advisors in New York.

MASSIVE SUPPLY A PROBLEM

But the huge number of foreclosed properties on the market has some economists feeling less optimistic.

Foreclosures and short sales, which typically occur at about 20 percent below market value, made up 40 percent of transactions last month -- the highest since April 2009 and up from 39 percent in February.

While the higher share of distressed properties is encouraging in that it should help to clear the market sooner of the glut of foreclosures already listed, it will, of course, prevent a sustained recovery in prices for some time, said Omair Sharif, an economist at RBS in Stamford Connecticut.

All-cash purchases made up a record 35 percent of sales in March, which some economists said could be a sign some investors were starting to seek a hedge against inflation.

It is probably way too early to realistically connect the dots from cash sales to inflation expectations as opposed to simple bargain hunting, said Steve Blitz, Senior Economist at ITG Investment Research in New York.

It isn't too early, however, to start watching to see whether this activity is rewarded by putting a bid on prices in certain areas and thereby reinforce what could be inflation-hedging activity.

Home sales in March rose across the board. Purchases of multifamily dwellings rose 1.6 percent and single-family home sales advanced 4.0 percent.

At March's sales pace, the supply of existing homes on the market slipped to 8.4 months' worth from 8.5 in February. A supply of between six and seven months is generally considered ideal, with higher readings pointing to lower prices.

The number of previously owned homes on the market rose 1.5 percent to 3.55 million -- well above the economy's natural rate of between 2 and 2.5 million.

If we add the shadow supply -- homes in foreclosure and homes likely to be in foreclosure because they are highly delinquent and homes that are likely to come back into the market as people perceive that demand is ticking up -- supply is in the range of 8 to 9 million, said Maximus Advisors' Muoio.