By Lucia Mutikani

WASHINGTON(Reuters) -U.S. home sales unexpectedly increased in January, but investors paying in cash are squeezing out first-time buyers from the housing market amid record low inventory and higher prices.

The surge in sales of previously owned homes last month reported by the National Association of Realtors on Friday likely reflected buyers rushing in to close on contracts in anticipation of mortgage rate rising further.

Mortgage rates have climbed to levels not seen since 2019 as the Federal Reserve is expected to start increasing interest rates next month to tame soaring inflation. Economists are anticipating as many as seven rate hikes this year.

“This is the rush to get in before borrowing costs move higher,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto. “Unfortunately, first-timers are being priced out of the increasingly expensive purchase.”

Existing home sales surged 6.7% to a seasonally adjusted annual rate of 6.50 million units last month. Sales rose in all four regions, with strong gains in the Midwest, the most affordable region. Sales jumped 9.3% in the densely populated South, which is experiencing an influx of residents from other regions as companies embrace remote work.

Economists polled by Reuters had forecast sales decreasing 1.0% to a rate of 6.10 million units.

Home resales, which account for the bulk of U.S. home sales, fell 2.3% on a year-on-year basis.

Strong demand for housing against the backdrop of a strengthening labor market and massive savings is outstripping supply, curbing sales. Builders have been unable to significantly ramp up construction because of shortages and higher prices for inputs like softwood lumber for framing as well as cabinets, garage doors, countertops and appliances.

TIGHT SUPPLY

According to a report this week from the National Association of homebuilders, delivery of these products was taking “months,” raising construction costs and delaying projects. The Commerce Department reported on Thursday that the backlog of homes approved for construction but yet to be started surged to a record in January.

Tight supply is keeping house prices elevated. The median existing house price increased 15.4% from a year earlier to $350,300 in January. Sales remained concentrated in higher price brackets, where houses are less scarce.

Sales of homes $250,000 and below, the much sought after price category continued to decline.

First-time buyers accounted for 27% of sales last month, compared to 33% a year ago. Rising mortgage rates could make home buying even less affordable for this group.

Individual investors or second-home buyers, who make up many cash sales, bought 22% of homes, up from 15% a year ago. Investors are renovating, and either reselling or renting the homes to take advantage of the hot housing market. All-cash sales made up 27% of transactions compared to 19% last January.

There were a record low 860,000 previously owned homes on the market last month, down 16.5% from a year ago. At January’s sales pace, it would take an all-time low 1.6 months to exhaust the current inventory, down from 1.9 months a year ago.

A six-to-seven-month supply is viewed as a healthy balance between supply and demand.

In January, houses typically remained on the market for 19 days, down from 21 days from a year ago. Seventy-nine percent of homes sold last month were on the market for less than a month.

(Reporting by Lucia Mutikani;Editing by Dan Burns and Chizu Nomiyama)