Home sales as measured by signed contracts rose sharply in May and posted their first year-over-year increase in more than a year, the National Association of Realtors reported Wednesday.

The NAR's Pending Home Sales Index gained 8.2% to 88.8 in May from an upwardly revised 82.1 in April, 13.4% higher than the 78.3 reading in May 2010. It was the first annual increase in the index since April 2010; the monthly increase was the strongest since last November when it rose 10.6%. The gain beat Wall Street expectations of a rise of 3%.

The large year-over-year gain, however, was due largely to the expiration of the federal home-buyer tax credit at the end of April, 2010 for deals closed before June 30, 2010. Still, the rise in the PHSI signals increases to come in existing home sales in June and July.

"Absorption of inventory is the key to price improvement, and this solid gain in contract signings implies that home values in many localities are or will soon be stabilizing as inventories get absorbed at a faster pace," said Lawrence Yun, NAR chief economist. "Some markets have made a rapid turnaround, going from soft activity to contract signings rising by more than 30% from a year ago, including areas such as Hartford, Conn.; Indianapolis; Minneapolis; Houston; and Seattle."

Contract signings were up across the board, led by a 12.9% gain in the West to a reading of 100.6, 13.5% ahead of May, 2010. The PHSI in the Northeast rose 7.3% to 69.2, 4.4% above a year earlier. The Midwest jumped 10.5% to 82.8, 17.2% ahead of May 2010. The South rose 4.1% to an index of 95.0, 14.6% percent higher than last May.

"Home sales still could be 15% to 20% higher," Yun said. "If banks would simply return to normal sound underwriting standards and begin lending to more creditworthy borrowers, we'd get a much faster recovery in the housing sector."