Existing home sales showed a slight increase in February aided by a record drop in prices. Trapped in foreclosure More Videos Special Report

NEW YORK (CNNMoney.com) -- A record plunge in prices of existing homes produced only a modest increase in sales in February, according to the latest reading on the battered housing market by an industry trade group released Monday.

The National Association of Realtors reported that sales by homeowners rose 2.9% in February to a seasonally adjusted annual pace of 5.03 million, up from January's reading of 4.89 million. It was the first month-over-month rise of the annualized pace since July.

"These are signs that housing's problems are being addressed, but I wouldn't break out the champagne yet," said Northern Trust chief economist Paul Kasriel. "We still have a ways to go."

Though February's pace beat economists' expectations, sales last month were still down 23.8% from a year earlier. Economists surveyed by Briefing.com expected the report to show existing home sales slowed to an annual pace of 4.86 million.

The median price of a home sold during the month fell 8.2% to $195,900 from $213,500 a year earlier - the largest year-over-year price drop on record. Before the start of the current housing slump, it had been 11 years since prices declined, when compared with the same period a year earlier.

"That's a huge drop in prices, which is how you move the merchandise," said Kasriel.

Sale prices have now fallen 15% from their peak in July 2006, and are down 14% from June 2007, when the most recent steady downturn began. That brings the median price of existing homes sold down to May 2004 levels.

The median price of a single-family home dropped significantly as well, falling 8.7% to $193,900. That was the largest drop in prices since the trade group began tracking them in 1989.

The report is a sign that the price environment is weaker than the Realtors' most recent forecasts. Though NAR chief economist Lawrence Yun said in a release that a "notable gain" in existing home sales is not expected until the second half of 2008, the Realtors' March forecast called for only a 6.3% decline in housing prices in the first quarter, compared to a year ago. NAR also forecast a median price of $200,500 for the first quarter. Given the current environment, March sales would need a very strong showing, both in median prices and the pace of sales, to reach the Realtors' forecast.

And though the drop in existing home prices helped bolster the average sales pace, the numbers were mostly boosted by an 11.3% rise in sales in the Northeast, which actually saw a 0.4% rise in median price. But even as the median home price fell 13.4% in the western part of the nation, home sales still dropped 1.1% in that region.

The report, however, showed encouraging news regarding housing inventories, as the excess supply of homes on the market fell in January. The Realtors estimated that there were 4 million homes available for sale, which represents a nearly 9.6-month supply. That was down from the 10.2-month supply in December.

"There is a huge oversupply on housing, so builders have been cutting back dramatically in production of new houses," said Kasriel. "That's exactly what has to happen to bring supply and demand back into the balance."

Solution is part of a larger problem. But the downturn in home building has hammered the results of the nation's largest builders and has taken its toll on the economy as well.

Employment in the construction sector fell by 30,000 jobs in February, according to the most recent ADP National Employment Report. The sector has shown a decline in every month since August 2006, and has lost a total of 236,000 jobs since then.

Furthermore, plummeting home prices affect homeowners' wealth, leading to lower consumer spending. Sinking home value could also send some mortgage borrowers into foreclosure.

"As house prices fall sharply, that can force more people into default, especially those who bought late in the cycle who owe more on their houses than their homes are worth," noted Kasriel.