WASHINGTON (Bloomberg) — Sales of previously owned homes rose in January to the highest level since May 2010 as investors took advantage of lower prices to buy distressed properties.

Purchases climbed
4.3 percent to a 4.57 million annual rate, less than forecast, from a revised 4.38 million pace in December that was slower than previously estimated, a report from the National Association of Realtors showed Wednesday in Washington. Distressed properties made up the largest portion of all purchases since April.

Almost one in four of all transactions was made by investors. That’s helping to clear the market of unsold properties and may stabilize prices. While the threat of more foreclosures risks slowing progress, housing may get a boost from gains in employment and mortgage rates that are near record lows.

“I don’t think we’re seeing a full-fledged recovery in housing,” said Michelle Meyer, a senior economist at Bank of America in New York. “Outside of investors and people wanting to buy distressed properties, the primary housing demand is recovering much more gradually.”

Distressed sales, comprised of foreclosures and short sales in which the lender agrees to a transaction for less than the balance of the mortgage, accounted for 35 percent of the total in January, up from 32 percent a month earlier.

Investors accounted for 23 percent of purchases last month, while cash transactions were about 31 percent, about the same as a year ago.

The median forecast in a Bloomberg News survey for January existing-home sales called for a rise to 4.66 million. Estimates of the 74 economists surveyed ranged from 4.4 million to
4.91 million after a previously reported 4.61 million pace in December.

Existing-home sales, tabulated when a contract closes, climbed to 4.26 million last year from 4.19 million in 2010. Demand peaked at 7.1 million in 2005 during the housing boom. In 2008, sales totaled
4.1 million, the least since 1995.

The number of previously owned homes on the market dropped to 2.31 million, the fewest since March 2005. At the current sales pace, it would take 6.1 months to sell those houses, the lowest since April 2006, down from 6.4 months in December.

The median price of a previously-owned home fell 2 percent to $154,700 from $157,900 in January 2011, Wednesday’s report showed. The median price dropped to $166,100 last year, the lowest since 2002, from $172,900 in 2010.

Sales of existing single-family homes increased 3.8 percent to an annual rate of 4.05 million units. Purchases of multifamily properties, including condominiums and townhouses, rose
8.3 percent to a 520,000 pace.

Purchases rose in all four U.S. regions, led by gains of 8.8 percent in the West and 3.5 percent in the South.

The fourth-warmest January on record may have helped bring out homebuyers. The National Oceanic and Atmospheric Administration reported the average temperature was 36.3 degrees Fahrenheit (2.39 degrees Celsius), 5.5 degrees above the 1901- 2000 long-term average.

The favorable conditions helped spark Home Depot’s biggest sales gain since the first quarter of 2004. The world’s largest home-improvement retailer said yesterday that receipts at stores open at least a year climbed 5.7 percent in the three months ended Jan. 29. Net income increased 32 percent, the Atlanta-based company said.

Wednesday’s housing report showed contract cancellations were reported by 33 percent of the group’s members in January, the same as a month earlier.

One asset for the market has been the improvement in employment. The jobless rate fell in January to a three-year low of 8.3 percent, and payrolls rose by 243,000 workers. Employment growth has accelerated in each of the past three months.

Greater affordability is also supporting home demand. The Realtors group’s measure of whether households earning the median income can afford a median-priced house at current interest rates reached record levels in the last three months of 2011.

Policy makers are working to help distressed homeowners. The top five mortgage lenders this month reached a $25 billion settlement with 49 states and the U.S. government over the use of faulty paperwork in foreclosures.

Federal Reserve Chairman Ben Bernanke said the central bank’s efforts to spur growth are being blunted by impediments to mortgage lending, and he called for more steps to heal the housing industry.

“The economic recovery has been disappointing in part because U.S. housing markets remain out of balance,” Bernanke told homebuilders on Feb. 10 in Orlando, Florida. “We need to continue to develop and implement policies that will help the housing sector get back on its feet.”

The foreclosure crisis is unlikely to subside any time soon. Owners of more than 14 million homes are in foreclosure, behind on their mortgages or owe more than their properties are worth, said RealtyTrac Inc., a property-data company in Irvine, Calif.

--With assistance from Chris Middleton in Washington.