U.S. home sales constrained by tight supply of properties

(Adds details, analyst comments, updates markets)

* Home sales rise 1.2 percent in February, below forecast

* Housing inventory up 1.6 percent, but down from year ago

* Median house price increases 7.5 percent from a year ago

By Lucia Mutikani

WASHINGTON, March 23 (Reuters) - U.S. home resales rebounded modestly in February against the backdrop of a persistent shortage of properties on the market, a trend that could undermine the spring selling season.

Sluggish home sales are another sign that economic activity slowed sharply in the first quarter, which could further diminish expectations that the Federal Reserve will increase interest rates in June.

"Part of the problem is that buyers don't have a lot of choice. The Fed singled out housing as a sector that remains slow, and it still is, but that doesn't mean the Fed shouldn't hike rates," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

The National Association of Realtors said on Monday that existing home sales rose 1.2 percent to an annual rate of 4.88 million units, failing to reverse January's 4.9 percent plunge.

Tight inventories are hurting sales by boosting home prices and limiting the selection of houses available to potential buyers. According to the Realtors group, buyers typically look at between 10 to 15 houses before making a purchase.

Economists had forecast home resales rising to a 4.90 million-unit pace last month.

February's sluggish sales suggested that broker commissions and residential investment weakened in the first quarter.

Economic growth estimates for the January-March period range from a 1.2 percent to 2 percent annual rate.

The economy grew at a 2.2 percent pace in the fourth quarter.

MORE BUILDING?

A tight housing supply means builders will need to ramp up construction. The U.S. housing sector index on Monday was up marginally, with shares in the largest homebuilder, DR Horton (NYSE: DHI - news) , gaining 0.1 percent. Shares (Berlin: DI6.BE - news) of Lennar Corp (NYSE: LEN - news) were up 0.3 percent, while Pulte Group advanced 0.1 percent.

The dollar fell against a basket of currencies, and prices for U.S. Treasury debt were marginally lower.

The median price for a previously owned home was 7.5 percent higher from a year ago. That was the largest percentage gain since February 2014 and suggested that the pace of home price increases, which had been slowing after double-digit growth for much of 2013, appears to be reaccelerating.

That is helping to sideline first-time buyers despite a firming labor market and government steps to ease credit conditions.

First-time buyers accounted for 29 percent of transactions last month, well below the 40 percent to 45 percent share that economists and realtors say is required for a strong housing recovery.

In February, the inventory of unsold homes on the market rose 1.6 percent to 1.89 million units. Supply was, however, down 0.5 percent from a year ago.

Inventory growth should be averaging roughly 5.6 percent at this time of the year, when the market gets ready for the spring selling season, which runs from April through August and is traditionally the busiest time of the year for housing, according to the Realtors association.

"The next couple months are some of the most critical of the entire year for housing and sluggish numbers may continue if inventory doesn't increase, either through new home construction or by more existing owners listing their homes," said Bill Banfield, vice president at Quicken Loans in Detroit.

Realtors and economists say insufficient equity and uncertainty about the economy's strength were forcing potential sellers to stay longer in their homes. A recent survey by the Realtors association showed homeowners on average staying in their homes for 10 years instead of the typical seven years.

At February's sales pace, it would take 4.6 months to clear houses from the market, unchanged for a second straight month. A supply of six months is viewed as a healthy balance between supply and demand.

Apart from tight supply, sales last month were also constrained by harsh winter weather. Sales in the Northeast, which was slammed by storms for much of the winter, tumbled 6.5 percent last month. Sales in the Midwest were unchanged.

Sales rose in the South and West. (Reporting by Lucia Mutikani; Editing by Paul Simao)