Purchases of previously owned U.S. homes unexpectedly rose in July to the highest level since February 2007, consistent with further strength in the housing market.

Contract closings increased 2 percent to a 5.59 million annualized rate from the prior month’s revised 5.48 million pace, figures from the National Association of Realtors showed Thursday. The median forecast in a Bloomberg survey called for a drop to 5.43 million. Prices rose and inventory shrank.

Employment gains and low borrowing costs are helping encourage trade-up purchases, providing a little more fuel for the economy. The data and a report earlier this week showing the strongest pace of new construction since 2007 are consistent with the Federal Reserve’s view that housing is improving.

“Housing demand continues to improve,” Jennifer Lee, a senior economist in Toronto for BMO Capital Markets, said before the report. “The bigger story, about continued job growth, will remain the main support for the housing rebound.”

Estimates in the Bloomberg survey of 73 economists ranged from 5.3 million to 5.65 million. The prior month’s pace was revised from a previously reported 5.49 million.

Existing home sales, tabulated when a purchase contract closes, account for more than 90 percent of the residential market. New-home purchases, which make up about 7 percent and are tabulated when contracts are signed, are considered a timelier barometer.

Compared with a year earlier, existing-house sales increased 10.3 percent.

Median Price

The median price of an existing home climbed 5.6 percent from July 2014 to reach $234,000.

While outsized gains in property values hurt affordability for prospective buyers, more gradual property appreciation helps make it easier for homeowners to sell their dwellings.

First-time buyers accounted for 28 percent of all purchases, down from 30 percent a month earlier. All-cash transactions made up about 23 percent, down from 29 percent a year earlier and a sign that investors are gradually stepping out of the market.

Distressed purchases, comprised of foreclosures and short sales, in which the lender agrees to a transaction for less than the balance of the mortgage, accounted for 7 percent of the total, down from 8 percent in June.

The number of previously owned homes on the market fell 0.4 percent to a three-month low of 2.24 million. At the current sales pace, it would take 4.8 months to sell those houses compared with 4.9 months at the end of June. Less than a five months’ supply is considered a tight market, the Realtors group has said.

Lean Inventory

“We have this broad-based housing shortage,” Lawrence Yun, NAR chief economist, said at a news conference as the figures were released. “Rents are rising fast, home prices are rising fast. This is a result of under-production.”

Sales of existing single-family homes increased 2.7 percent to an annual rate of 4.96 million. Purchases of multifamily properties — including condominiums and townhouses — fell 3.1 percent to a 630,000 pace.

Demand rose in two of four regions, led by a 4.1 percent gain in the South.

Surging rental costs and limited vacancies have the potential to persuade more Americans to take the homeownership plunge, which may encourage builders to step up construction. Residential starts rose in July to a 1.21 million annualized rate, the most since October 2007, Commerce Department data showed.

Job Market

Persistent job growth and favorable borrowing costs are the building blocks for improving housing demand. The economy has created almost 1.5 million new jobs this year through July, after 3.1 million in 2014.

Another report Thursday showed employers are keeping headcounts in line with demand. First-time claims for jobless benefits rose by 4,000 to 277,000 last week, according to the Labor Department. Applications have been lower than 300,000, a level typically associated with an improving job market, since early March.

The average rate on a 30-year fixed mortgage is below 4 percent, less than a half percentage point above the 3.6 percent rate in February that was the lowest since May 2013, according to Freddie Mac data.

A pickup in the number of available properties, particularly entry-level homes, would provide an added boost to the housing market by restraining price appreciation and luring more young adults who have been largely absent from the market.

Fed policy makers, at their July meeting, noted the improvement in housing, according to the minutes released on Wednesday. Central bankers, who are considering when to raise borrowing costs, last raised the benchmark rate in 2006. The Fed has held it close to zero since 2008 to try to stimulate economic growth.