WASHINGTON (Reuters) - New U.S. single-family home sales unexpectedly surged in July, reaching their highest level in nearly nine years amid robust demand, brightening the housing market outlook and bolstering views that economic growth will pick up in the third quarter.

A real estate sign advertising a new home for sale is pictured in Vienna, Virginia, outside of Washington, October 20, 2014. REUTERS/Larry Downing/File Photo

Housing market strength should offset some of the drag from manufacturing, with other data on Tuesday showing production at factories remaining constrained by weak orders.

“A very rosy picture is beginning to emerge on the housing market, pointing to sustained buoyancy in the sector’s recovery, which remains one of the few bright spots for the U.S. economy,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Commerce Department said new home sales jumped 12.4 percent to a seasonally adjusted annual rate of 654,000 units last month, the highest level since October 2007. It was the fifth straight monthly gain in new home sales.

July’s increase, however, likely exaggerates housing market strength as it has not been matched by robust housing starts.

Still, sales were up 31.3 percent from a year ago.

Economists had forecast single-family home sales, which account for about 9.6 percent of overall home sales, slipping to a rate of 580,000 units last month. July’s surprise increase pushed new home sales well above their second-quarter average, pointing to sustained momentum in the market for new homes.

The gain came mostly from homes not yet started or still under construction, suggesting a rebound in residential construction investment, which was a minor drag on economic growth in the second quarter.

Housing market strength, marked by rising home values which are boosting household wealth, is helping to buoy consumer spending, cushioning the blow to the economy from a downturn in business spending as well as an inventory correction.

Tightening labor market conditions, which are steadily lifting wages, as well as mortgage rates near historic lows are supporting housing. Reports last week showed groundbreaking on single-family housing projects rising to a five-month high in July and sentiment among homebuilders increasing in August.

Robust demand for new homes is boosting homebuilders like Toll Brothers TOL.N, which on Tuesday reported a rise in revenue for the fourth straight quarter. The luxury homebuilder said it had sold more houses at higher prices.

The solid housing market is also supporting purchases of big-ticket electronics such as home theater systems, fattening profits for companies like Best Buy BBY.N. The largest U.S. electronics retailer on Tuesday reported a higher-than-expected quarterly profit and raised its earnings outlook.

RAISES NEAR-TERM OUTLOOK

New home sales are likely benefiting from a chronic shortage of previously owned houses available for sale. With sales surging, the inventory of new homes on the market fell to an eight-month low in July. This means builders will need to ramp up construction activity to meet demand.

At July’s sales pace it would take 4.3 months to clear the supply of houses on the market, the fewest since June 2013, and down from 4.9 months in June.

“This marginally raises our near-term outlook for the housing market, as tightness in the new home market suggests further impetus to new construction ahead,” said Andrew Hollenhorst, an economist at Citigroup in New York.

In the wake of the report, the broader PHLX housing index .HGX, which includes builders, building products and mortgage companies, rose 2.07 percent, outperforming the overall U.S. stock market.

Shares in the nation's largest homebuilder D.R. Horton Inc DHI.N rallied 3.43 percent and Lennar Corp LEN.N surged 3.89 percent. Toll Brothers vaulted 8.5 percent. The dollar was little changed against a basket of currencies, while prices for U.S. government debt fell.

New single-family homes sales soared 40.0 percent in the Northeast and increased 1.2 percent in the Midwest. Sales in the South, which accounts for more than half of new home sales, jumped 18.1 percent to their highest level since July 2007. Sales were flat in the West, which has seen a sharp increase in home prices amid tight inventories.

“Momentum is finally shifting back toward the new home

market, particularly in the South, which has seen sales and new construction take off this year as job growth and in-migration have strengthened,” said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Separately, data firm IHS Markit said its flash U.S. manufacturing purchasing managers’ index slipped to a reading of 52.1 in August from July’s nine-month high of 52.9. A reading above 50 indicates expansion in the factory sector.

Manufacturers reported slower order growth this month,

with some companies saying that a number of clients had adopted a wait-and-a-see approach until the outcome of the U.S. presidential election in November.

A third report from the Richmond Federal Reserve showed factory activity in the region covering Maryland, Virginia, West Virginia and the Carolinas plummeted to its lowest level since January 2013. There were sharp contractions in new orders and order backlogs, and workers saw a reduction in hours.

“This reminds us that goods production in the economy isn’t going quite as well as housing,” said Steve Blitz, chief economist at M Science in New York.