Pending sales of previously owned homes rose for a second straight month in March, while construction spending edged higher, according to reports on Monday that suggested moderation in the long housing slump.

The reports boosted U.S. stocks <.DJI> and lent support to the view that the recession, now in its 17th month, was close to finding a bottom. A Federal Reserve survey of loan officers showed demand for prime mortgages rose in the first quarter for the first time since early 2007.

On balance, it's an encouraging set of news. Pending home sales tell us, as far as the housing sector is concerned, we are getting near the bottom, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in March, rose 3.2 percent as first-time buyers waded into the market to take advantage of favorable prices and mortgage rates.

A report from the U.S. Commerce Department showed construction spending rose 0.3 percent in March, the first increase in six months.

The U.S. stock market rallied, with the Dow Jones U.S. home construction index <.DJUSHB>, jumping nearly 9 percent.

Investor bets that government stress tests for banks won't compel them to raise large amounts of capital, which could dilute shareholders' investments, also boosted stocks.

Other recent data showed the pace of decline in sales of new and previously owned homes was moderating while manufacturing was improving.

The pending home sales report added to evidence that sales have reached a bottom, said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut.

That's critical because once sales bottom, it's only a matter of time before you work off excess inventories. That's the key to stabilization in the financial system and the economy at large. We're closer to that than people thought just a few months ago, said Darda.

FIRST-TIME BUYERS TO THE RESCUE

The collapse of the U.S. housing market and the resulting credit crisis pushed the economy into recession and analysts have watched home sales for signs of an end to the downturn.

NAR Chief Economist Lawrence Yun attributed the rise in signed contracts for home purchases to first-time buyers taking advantage of the combination of low prices and mortgage rates, as well as an $8,000 tax credit, making homes more affordable.

We need several months of sustained growth to demonstrate a recovery in housing, which is necessary for the overall economy to turn around, said Yun.

The NAR's Housing Affordability Index edged down to in March from a record in February due to higher home prices. The index was 30.8 percentage points higher than a year ago.

The index is a broad measure of housing affordability linking the relationship between home prices, mortgage interest rates and family income. The Senior Loan Officers Survey from the Fed -- the U.S. central bank -- found a surge in demand for prime mortgages even as banks tightened home loan standards.

Separately the U.S. Commerce Department report said that while construction spending rose, private construction slipped, mainly on a 4.2 percent decrease in residential building.

I think in coming months we will start to see the residential side flattening out, said IHS Global Insight's Gault. We are still holding for fourth-quarter recovery (in the economy), (but) it's possible it could come sooner.

Public construction increased 1.1 percent after gaining 1.3 percent in February. Most of the boost came from state and local governments.

Some economists remain skeptical that the economy will recover later this year, arguing that the government's $787 billion package of increased spending and tax cuts will be insufficient to turn around the economy.

Monday's data is consistent with the second-half recovery scenario currently being reflected in markets, said Steven Ricchiuto, chief economist at Mizuho Securities USA in New York.

But I continue to hold on to the 2010 recovery forecast on the assumption that the benefits from the Obama stimulus package will fail to assure a self-sustained upturn in the economy.

(Additional reporting by Lisa Lambert and Mark Felsenthal; Editing by James Dalgleish)

Manufacturing