By Anna Louie Sussman

WASHINGTON -- Homebuying activity rose in October for the second straight month to a new cyclical high despite rising prices and shrinking inventory, a sign housing demand remains buoyant as the year comes to a close.

October's sales of previously owned homes rose 2.0% over the month to a seasonally adjusted annual rate of 5.60 million, the National Association of Realtors said Tuesday, the strongest pace since February 2007. Sales of previously owned homes in October were up 5.9% from a year earlier.

Economists surveyed by The Wall Street Journal had expected the sales rate to decline to 5.45 million in October.

Existing-home sales account for the vast majority of U.S. homebuying activity. After hitting anannual rate of 5.57 million in June, sales softened over most of the third quarter before picking up over the past two months. September's sales pace was revised up slightly to 5.49 million.

But the sector faces challenges ahead, including rising prices, a dwindling supply of inventory and an uptick in mortgage rates.

"Going forward, we will apparently have a tug of war with regard to affordability between rising employment and wages on one side and rising home prices and mortgage rates on the other," said Stephen Stanley, chief economist at Amherst Pierpont Securities.

Sales were up on an annual and monthly basis in all four regions of the country, pointing to a "broad-based" housing recovery, said Lawrence Yun, the NAR's chief economist.

Gus Faucher, deputy chief economist at PNC Financial Services Group, said there was still a "great deal of pent-up demand" out in the market.

"Fundamentals for the housing marketare good, with job and income gains and low mortgage rates supporting demand," he said in a note to clients. "Tight supplies could be a near-term constraint, however."

At the latest sales pace, it would take 4.3 months to exhaust the supply of previously owned homes on the market, down from 4.8 months in October 2015. Housing inventory has fallen on a year-over-year basis for 17 straight months, NAR said.

And prices have been rising far faster than wage gains. The median price of an existing home sold in October was $232,200 up 6.0% on the year. Still, people seemed eager to pony up. First-time home buyers accounted for 33% of October sales, according to NAR, down from 34% in September, a figure that matched the highest level since July 2012. Distressed sales ticked up 1 percentage point to account for 5% of all sales.

But Stifel Economics Chief Economist Lindsey Piegza cautioned that swiftly rising home prices could leave many would-be buyers priced out, eventually stalling the housing recovery.

"Many potential buyers continue to struggle to accumulate the wealth needed for a down payment, amid moderate job and income growth, which could serve to undermine at least some improvement in residential investment," she said.

The U.S. housing market's prolonged recovery following the 2007-09 recession was a solid contributor to overall economic growth in recent years. But a pullback in residential investment during the second and third quarters, following eight consecutive quarters of growth, has acted as a drag on the broader economy.

Still, home-building activity rebounded in October, with starts in single-family and multifamily housing posting increases, and permits edging higher as well, the Commerce Department said last week. Home-builder sentiment also held at an elevated level in November, the National Association of Home Builders said last week, although construction is still at historically low levels.

The Commerce Department's report on new home sales will be released Wednesday.

News Corp, owner of The Wall Street Journal, also operates Realtor.com under license from the National Association of Realtors.

Borrowing costs are still historically low for prospective home buyers who qualify for loans, and it is possible October's rise in home sales reflects a rush to buy ahead of more potential interest rate rises in the future. The average interest rate on a 30-year fixed-rate mortgage in October was 3.47%, below the October 2015 average of 3.80%, according to Freddie Mac. But mortgage rates have already risen since then and may continue to, if, as many economists surveyed by The Wall Street Journal predict, Federal Reserve officials raise interest rates at their December policy meeting. That could further damp enthusiasm for home buying.

Write to Anna Louie Sussmanat anna.sussman@wsj.com

(END) Dow Jones Newswires

November 22, 2016 12:07 ET (17:07 GMT)

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