WASHINGTON, May 19 (Reuters) - Contracts to purchase previously owned U.S. homes increased for a third straight month in April, likely as a temporary retreat in mortgage rates pulled buyers back into the market.

Economists, however, shrugged off the larger-than-expected rise in pending home sales, reported by the National Association of Realtors on Tuesday. Most expected demand for houses to remain subdued this year, noting that mortgage rates remained very high relative to the start of the year.

They also argued that housing inventory was still tight, especially for entry-level homes, keeping prices elevated.

"We see little prospect of a marked further recovery in housing market activity in the near term," said Oliver Allen, senior economist at Pantheon Macroeconomics. "Slower population growth, due to sharp cuts to immigration, looks set to weigh on housing demand ahead, as does the weak labor market and depressed consumers' confidence."

The pending home sales index rose 1.4% last month to 74.8, the NAR said. Economists polled by Reuters had forecast contracts, which become sales after a month or two, increasing 1.0%. Contracts surged 6.6% in the Northeast and advanced 3.0% in the Midwest region. They climbed 0.4% in the West, but fell 0.7% in the South.

Pending home sales increased 3.2% year-on-year in April.

HOMEBUILDER SENTIMENT STILL SUBDUED  

The popular 30-year fixed mortgage rate jumped to an average of 6.46% at the beginning of April, data from mortgage finance agency Freddie Mac showed, as the U.S.-Israel war with Iran boosted oil prices and U.S. Treasury yields. 

The rate, which tracks Treasury yields, had dropped to 5.98% on the eve of the conflict amid expanded purchases of mortgage-backed securities by Freddie Mac and Fannie Mae. It averaged 6.30% at the end of April and has since risen to 6.36%.

The housing market has remained on the back foot this year, weighed down by higher borrowing costs, tariffs on imported goods, including lumber, as well as still-tight inventory and elevated home prices.

Residential investment, which includes home building and broker commissions, has contracted for five straight quarters.

A survey on Monday showed homebuilder sentiment remaining subdued in May, with mortgage rates and economic uncertainty because of the Middle East conflict, high land, labor and construction costs cited as constraints. 

The stock of previously owned houses is running well below its pre-pandemic level, with the shortage most acute for starter homes. The median single-family house price increased ⁠1.7% in the 12 months through February, latest data from the Federal ​Housing Finance Agency showed.

"Interest rates are up nearly 25 basis points since the end of April," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics. "We think the rise in rates along with an uncertain economic outlook and higher gas prices straining household budgets will keep a lid on home sales until late in the year."