New home sales rose 2.1 per cent last month compared with April to a seasonally adjusted annual rate of 476,000, the highest level since July 2008, the Commerce Department reported Tuesday.
The median price of a new home sold in May was $263,900, up 3.3 per cent from a year ago.
Sales of new homes remain below the 700,000 annual rate that's considered healthy by most economists. But the pace has increased 29 per cent from a year ago.
Analysts say the housing recovery is looking more sustainable and should continue to boost economic growth this year, offsetting some drag from higher taxes and federal spending cuts.
The sales gains in May were led by a 40.7 per cent increase in the Midwest followed by a 20.7 per cent gain in the Northeast. Sales were also up 3.6 per cent in the West but they fell 9 per cent in the South.
The inventory of unsold homes rose 2.5 per cent to 161,000 in May, the highest level since August 2011 but still just 13 per cent higher than the record low for inventories set in July 2012. Prices of new homes have been rising in part because more people are bidding on a limited number of homes.
The National Association of Realtors reported last week that sales of previously occupied homes surpassed 5 million in May. It was the first time that's happened in 3 1/2 years.
Sales of previously owned homes rose to an annual rate of 5.18 million in May. The last time sales had exceeded 5 million was in November 2009, a month when the pending expiration of a home-buying tax credit briefly inflated sales
Steady hiring and low mortgage rates have encouraged more people to buy homes. And with demand up, prices rising and few homes on the market, builders have grown more optimistic about their prospects, leading to more construction and jobs.
Last week, Federal Reserve Chairman Ben Bernanke cited the housing gains as a major reason the Fed's economic outlook has brightened.
Still, mortgage rates have jumped in recent weeks. And they're expected to rise further now that the Fed has signalled it plans to scale back its bond purchases this year if the economy continues to strengthen. A pullback in the bond purchases would likely send long-term borrowing rates up. Higher mortgage rates could slow some of the housing market's momentum.
For now, a brighter outlook for housing has made builders more optimistic. The National Association of Home Builders/Wells Fargo builder sentiment index rose in June to 52, up from 44 in May.
That was the highest reading in more than seven years and the largest monthly increase in more than a decade. A reading above 50 indicates that more builders view sales conditions as good rather than poor.