"We should be seeing more sales with financing so cheap," Larson said. "The fact we're not speaks to the severity of the jobs crisis and the ongoing lack of confidence in the future direction of home prices."

Lawrence Yun, chief economist for the National Assn. of Realtors, which produces the pending home sales index, cautioned that the housing market probably would remain weak without the $8,000 federal tax credit for buyers that expired April 30.

"Home sales will remain soft in the months ahead, but improved affordability conditions should help with a recovery," Yun said.

A forward-looking indicator based on the number of purchase contracts signed, the index rose to 79.4, up from a downwardly revised 75.5 in June. That level remains 19.1% below that in July 2009, when it was 98.1.

An index reading of 100 is equal to the average level of contract activity during 2001, which was the first year the group began tracking the data as well as the first of five straight years of increases for sales of previously owned homes.

The pending home sales index was up 11.6% in the West in July from the prior month, 1.2% in the South, 4.1% in the Midwest and 6.3% in the Northeast.

Home builder stocks rose after the report, with the Standard & Poor's index of 12 major builders increasing 2% after rising 3.6% on Wednesday. Los Angeles-based KB Home closed at $11.66, up 21 cents, or 1.8%.