The recovery, however, will likely remain gradual against a backdrop of relatively high unemployment and sluggish wage growth, which are sidelining first-time buyers and keeping many young adults from seeking their own accommodation.

"This is welcome news in an otherwise mixed outlook," said Diane Swonk, chief economist at Mesirow Financial in Chicago. "We are still a long way from the housing market recovering from the bust."

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New home sales jumped 18.0 percent to a seasonally adjusted annual rate of 504,000 units, a second straight monthly gain that took them to the highest level since May 2008, the Commerce Department said on Wednesday.

Though new home sales account for only about 9 percent of the market, the increase helped allay fears of renewed weakness after a surprise decline in home resales last month.

"We expect some of this buoyancy to be reversed in the coming month, but continue to believe that the underlying fundamentals of the housing sector remain favorable," said Millan Mulraine, deputy chief economist at TD Securities in New York.

U.S. financial markets were little moved by the data, but housing shares tumbled after home builder KB Home reported earnings that missed Wall Street's expectations.

KB Home shares fell 5.7 percent, while Pulte Group slipped 0.6 percent and Toll Brothers dropped 0.9 percent. The overall housing market index, however, was up marginally in mid-afternoon, tracking broader indexes.

CHALLENGING ENVIRONMENT

The National Association of Realtors said on Monday that sales of previously owned homes fell in August for the first time in four months as the investors who had been supporting the market stepped away.

Economists hope their departure will leave an opening for first-time buyers, but worry still-high unemployment and sluggish wage growth will continue to constrain sales.

The share of first-time buyers in the home resale market has been stuck around 29 percent, well below the 40 percent to 45 percent considered as ideal by economists and real estate agents.

"It's still a challenging environment for those buyers," said Guy Berger, an economist at RBS in Stamford, Connecticut. "You can make a good case for a slow, gradual improvement."

In a separate report, the Mortgage Bankers Association said applications for loans to purchase homes fell last week as mortgage rates crept up. New loan applications are well off peaks seen early last year.

With average hourly earnings up only 2.1 percent over the past year, many Americans are opting to rent, while some of those who have recently graduated from college are moving back home or staying with friends, weighing on home sales.

According to government data released last week, 492,000 households were formed last year, well below the one million economists say would be consistent with a healthy market.

"Household formation, a major driver of new construction, is falling asleep at the wheel," said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts.

Despite the rise in sales in August, the stock of new houses on the market hit its highest level in four years, giving buyers more choices.

At August's sales pace it would take 4.8 months to clear the supply of houses on the market, down from 5.6 months in July. A six months' supply is normally considered a healthy balance between supply and demand.

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