Weak home purchase contracts hint at pause in sales activity

* Pending home sales fall 1.8 percent in June

* Decline follows five straight months of increases

* Contracts rise in two regions, fall in two others

By Lucia Mutikani

WASHINGTON, July 29 (Reuters) - Contracts to buy previously owned U.S. houses unexpectedly fell in June after five straight months of increase, suggesting some cooling in home resales activity after recent hefty gains.

The decline in contracts, which came on the heels of reports showing the pace of home price appreciation stalling in major cities and new home sales dropping, did little to change perceptions that the housing market recovery was on track given a tightening labor market.

"The June decline is a hiccup. It is important to bear in mind that there is still plenty of fundamental support for the housing market," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

The National Association of Realtors said on Wednesday its Pending Home Sales Index, based on contracts signed last month, declined 1.8 percent to 110.3.

Still, the index was the third highest reading for this year and contracts were up 8.2 percent from a year ago.

Pending home contracts become sales after a month or two, and last month's drop pointed to a pause in sales of existing homes after they reached a near 8-1/2-year high in June.

Economists had forecast pending home sales rising 1.0 percent last month.

U.S. financial markets were little moved by the data as investors awaited the outcome of the Federal Reserve's two-day policy meeting. The housing index was up 0.97 percent.

The U.S. central bank's statement will be scrutinized for clues on the timing of the first rate hike, which is expected later this year. The Fed has kept its short-term interest rate near zero since December 2008.

While contracts to buy a previously owned home and new home sales fell last month, and the pace of house price increases stalled in May, other housing market indicators such as groundbreaking on new projects, building permits and builder confidence have painted a bullish picture for housing.

"We would interpret the June weakness as payback after housing activity made a strong start to 2015 and expect the housing market to remain in recovery mode," said Blerina Uruci, an economist at Barclays (LSE: BARC.L - news) in New York.

A strengthening labor market, which is starting to lift wages, is driving demand for housing, particularly among young adults. A large portion of that is going into the rental market, boosting construction of multi-family homes.

A report on Tuesday showed the rental vacancy rate in the second quarter fell to its lowest level since the mid-1980s. Economists say sky-rocketing rents will soon make home buying a more attractive option for Americans.

Last month, home purchase contracts edged up 0.4 percent in the Northeast and gained 0.5 percent in the West. They declined 3.0 percent in both the South and the Midwest.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)