(Reuters) - U.S. home resales rose more than expected in May and the stock of properties for sale was the highest in more than 1-1/2 years, suggesting that housing was pulling out of a recent slump.

The National Association of Realtors said on Monday existing home sales increased 4.9 percent to an annual rate of 4.89 million units. May's increase was the largest since August 2011.

"The housing market has quite some ways to go to recover its recent sluggishness, but positive momentum in the sector suggests that housing has begun to show signs of life," said Gennadiy Goldberg, an economist at TD Securities in New York.

Economists had forecast sales rising only 2.2 percent to a 4.73 million-unit pace last month. Sales, which rose in all four regions, were driven by the single-family home segment, the largest portion of the market.

They likely reflected a pause in mortgage rates. The housing recovery stalled in the second half of 2013 as interest rates increased and prices surged against the backdrop of a dwindling supply of properties available for sale.

Despite the second consecutive month of gains, sales were down 5.0 percent compared to May last year. They remain down 9 percent from a peak of 5.38 million units hit in July.

Still, the increase in sales will be welcomed by the Federal Reserve, which is closely watching the housing market as it contemplates the future course of monetary policy.

Fed Chair Janet Yellen has warned a prolonged slump could undermine the economy. The relatively bullish housing report offered further evidence that the economy has regained strength after weakening sharply in the first quarter.

Rising sales and a steady pace of groundbreaking should help residential investment to modestly rebound in the second quarter after two straight quarters of decline.

Housing stocks rose on the data, outperforming the broader market. KB Home (KBH.N) rose 1.6 percent, while Toll Brothers (TOL.N) rose 1.3 percent. PulteGroup (PHM.N) gained 1.6 percent.

FIRST-TIME BUYERS ABSENT

A separate report showed manufacturing expanding strongly in June. Financial data firm Markit said its preliminary or "flash" U.S. Manufacturing Purchasing Managers Index rose to 57.5, the highest reading since May 2010, from 56.4 in May.

A reading above 50 signals expansion in economic activity.

While home sales are rising, pockets of weakness remain.

First-time buyers, a necessary ingredient for a strong housing market, continue to hug the sidelines. Many have also been priced out by stringent lending practices.

Last month, first-time buyers accounted for only 27 percent of the transactions, hovering near their lowest level since the Realtors group started tracking the series.

A market share of 40 percent to 45 percent for first-time buyers is considered by economists and real estate professionals as ideal. Investors, who have propped up housing are retreating fast, accounting for only 16 percent of transactions in May.

The inventory of unsold homes on the market increased 6.0 percent from a year-ago to 2.28 million in May, the highest level since August 2012. In May, the month's supply of existing homes increased to 5.6 months from 5.7 months in April. Six months' supply is normally considered a healthy balance between supply and demand.

Still, the improving supply is helping to temper price increases. The median home price increased 5.1 percent from a year ago, the smallest increase since March 2012.

"This is a good sign for the longer-term health of the housing market," said John Ryding, chief economist at RDQ Economics in New York. "We do not expect housing to be a big driver of growth this year but these data at least suggest that it may not be a drag either."