The National Association of Realtors says home sales rose 2.4 percent to a seasonally adjusted annual rate of 5.15 million, the highest since last September.
More homeowners are selling their homes, mortgage rates remain low and home price gains have slowed this year. That's made home purchases more affordable.
Sales peaked in July 2013 and then fell as interest rates rose from low levels. Harsh winter weather also slowed sales earlier this year. As a result, July's sales are still 4.3 percent lower than a year ago. They also remain below the 5.5 million considered consistent with a healthy housing market.
Still, the rise in home sales comes after other encouraging data show that the housing market is improving. Steady job gains and rising consumer confidence have led more Americans to purchase homes. That's a contrast from earlier this year, when weak sales and limited homebuilding led economists to peg housing as a missing piece of the economic recovery. Federal Reserve Chair Janet Yellen recently told Congress that housing has been disappointing this year.
But new-home construction surged 15.7 percent in July to a seasonally adjusted annual rate of 1.09 million homes, the government said Tuesday.
And applications for building permits, considered a good sign of future activity, also showed strength in July, advancing 8.1 percent to an annual rate of 1.05 million after declining in the prior two months.
Separately, the sentiment index from the National Association of Home Builders and Wells Fargo rose in August to 55, up two points from a revised 53 for July. Readings above 50 indicate more builders view sales conditions as improving.
"For those getting a bit antsy about the state of the housing market recovery, this rounds out a trio of better-than-expected reports that point to improving activity through the early summer months," said Robert Kavcic, an economist at BMO Capital Markets.
The Realtors report also showed that healthy sales make up an increasing share of purchases. Fewer home sales stem from foreclosures or involve homes where the seller owed more on their mortgage than the home was worth. Those "distressed" sales made up just 9 percent of sales in July, the lowest proportion since the Realtors began tracking the figure in October 2008. Distressed sales, which are usually at much lower prices, made up 36 percent of sales in 2009.
The number of homes for sale rose 3.5 percent in July from June to 2.37 million, the most in nearly two years. That gives buyers more choices and restrains price gains. The median time that homes remained on the market was 48 days, up from 42 a year ago.
First-time homebuyers made up 29 percent of sales, up slightly from the previous month and the second straight gain. Still, that's far below the typical figure of 40 percent. First-time buyers are critical to fueling any housing recovery, as they enable current homeowners seeking to buy larger homes to sell.
First-time buyers are recovering slowly from a low of 26 percent earlier this year. They are likely benefiting from strong job gains. Hiring since February has been at the healthiest pace since 2006.
Home prices are increasing at a slower clip, which should help ease affordability pressures.
Data provider CoreLogic said that prices rose 7.5 percent in June compared with 12 months earlier. That's the smallest year-over-year gain in 20 months.
And average rates for 30-year mortgages fell to 4.12 percent from 4.14 percent, mortgage company Freddie Mac said last week. Mortgage rates are below recent peaks of about 4.5 percent at the beginning of the year.