Sales of existing single-family, coop and condominium homes rose 7.7% to a seasonally adjusted annual rate of 5.03 million in August from an upwardly revised 4.67 million in July, 18.6% higher than the pace of August 2010 and well ahead of the 4.75 million pace expected by Wall Street.

The national median existing-home price, however, dropped 5.1% year-over year to $168,300. Distressed homes accounted for 31% of sales in August, up from 29% in July but down from 34% in August 2010.

Single-family home sales rose 8.5% to a seasonally adjusted annual rate of4.47 million, 20.2% above the 3.72 million pace of August 2010. The median existing single-family home price fell 5.4% year-over-year to $168,400.

Existing condominium and co-op sales rose 1.8% to a seasonally adjusted annual rate of 560,000, 8.3% higher than a year earlier, with the median price down 3.3% to $167,500.

The Realtor group said investors accounted for 22% of purchase activity in August, up from 18% in July and 21% in August 2010. First-time buyers purchased 32% of homes in August, flat with July and up slightly from 31% last August. All-cash sales accounted for 29% of transactions, also flat with July and up slightly from 28% in August 2010.

Cancellations caused by declined mortgage applications or failures in loan underwriting from appraised values coming in below the negotiated price were reported by 18% of NAR members in August, up from 16% July and 9% in August 2010.

Total housing inventory at the end of August fell 3.0% to 3.58 million, an 8.5-month supply at the current sales pace, down from a 9.5-month supply in July.

Regionally, sales in the Northeast ticked up 2.7% to an annual pace of 770,000 in August, 10.0% above a year earlier, with the median price at $244,100, 5.1% below August 2010. The Midwest rose 3.8% to a pace of 1.09 million, 26.7% above August 2010, with the median price down 3.5% to $141,700. The South rose 5.4% to a rate of 1.94 million in August, 16.9% ahead of August last year, with the median price down 0.8% to $151,000. The West jumped 18.3% to a pace of 1.23 million, 20.6% higher than August 2010, with the median price down 13% to $189,400.

Lawrence Yun, NAR chief economist, saw positive market fundamentals in the data. "Some of the improvement in August may result from sales that were delayed in preceding months, but favorable affordability conditions and rising rents are underlying motivations," he said. "Investors were more active in absorbing foreclosed properties. In additional to bargain hunting, some investors are in the market to hedge against higher inflation."

He also took note of the storms that swept through the South and into the Northeast in late August. "We had some disruptions from Hurricane Irene in the closing weekend of August, when many sales normally are finalized, along the Eastern seaboard and in New England. As a result, the Northeast saw the smallest sales gain in August, and some general impact is expected in September with widespread flooding from Tropical Storm Lee."

Anaysts were wary. Adam Rudiger at Wells Fargo said in a research note, "With investors accounting for 22% and distressed transactions accounting for 31% of August existing home sales, the existing market is benefiting from transactions not seen in the new market. Positively, however, total inventory declined 13.1% year over year. Highlighting the difficulty in mortgage qualifying, cancellations in August increased to 18% from 9% a year ago."

Buck Horne at Raymond James also expressed concern over the elevated distressed inventory in the sales report. He wrote, "Overall, while we are encouraged to see distressed inventory clearing the market, in the near term, we would highlight that these sales often compete against the homebuilders and produce difficult comps which can lead to appraisal issues. Looking ahead, we suspect demand may be stabilizing as consumer fears of an imminent recession begin to subside. But we remain concerned that near-term trends in existing home sales will be increasingly marked by high levels of distressed sales, as banks have reportedly begun re-accelerating foreclosure processing, which likely portends more pressure on home prices later this year."