Existing home sales rose in August to their highest in five months as lower prices and rock-bottom interest rates drew more buyers into a still moribund market.

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

Sales climbed more than expected, up 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 life into the sector and the struggling wider economy, the Federal Reserve said on Wednesday it would try to lower long-term borrowing costs and bolster housing.

The Fed said it would launch a $400 billion program to weight its balance sheet more heavily toward longer-term securities. It also said it would reinvest proceeds from maturing mortgage and housing agency bonds it holds back into the mortgage market, an acknowledgment of just how weak housing remains.

The Fed's low interest rate policies have helped push 30-year mortgage rates to their lowest since at least 1971, when mortgage finance provider Freddie Mac started tracking them.

U.S. stocks closed sharply lower after the Fed's announcement, while prices for long-term government debt rose, pushing yields lower.

While the Fed is ramping up its support, some other props for the housing 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 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 disruption 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.

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

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