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WRAPUP 2-U.S. home sales surge, but supply remains a headache

(Adds Fed rate decision, updates markets)

* Existing home sales increase 3.0 percent in February

* Housing inventory rises 4.6 percent month-on-month

* Median house price jumps 5.9 percent from year ago

WASHINGTON, March 21 (Reuters) - U.S. home sales rebounded strongly in February, boosted by hefty gains in the South and West regions, but a chronic shortage of houses on the market remains an obstacle heading into the spring selling season.

The National Association of Realtors said on Wednesday that existing home sales jumped 3.0 percent to a seasonally adjusted annual rate of 5.54 million units last month, ending two straight monthly declines.

"All signs point to a spring buying season of high prices and low inventory as any new construction that is added is snapped up quickly by buyers," said Danielle Hale, chief economist for realtor.com.

Economists polled by Reuters had forecast existing home sales rising 0.5 percent to a rate of 5.40 million units in February. Sales soared 6.6 percent in the South, where the bulk of sales activity occurs, and vaulted 11.4 percent in the West.

Sales tumbled 12.3 percent in the Northeast and fell 2.4 percent in the Midwest. Existing home sales, which account for about 90 percent of U.S. home sales, increased 1.1 percent on a year-on-year basis in February.

There is an acute shortage of homes, especially at the lower end of the market. According to the NAR, sales of houses priced below $100,000 plunged 17 percent from a year ago. Sales of properties in the $100,000-$250,000 price range slipped 1.0 percent on a year-on-year basis.

The Realtors group said there was double-digit sales growth for houses costing $250,000 and above. Houses for sale typically stayed on the market for 37 days in February, down from 41 days in January and 45 days a year ago. Forty-six percent of homes sold in February were on the market for less than a month.

The resulting high prices from the inventory squeeze, combined with rising mortgage rates, are a constraint for first-time buyers, who have been largely priced out of the market.

The 30-year fixed mortgage rate is at a four-year high of 4.44 percent.

The Federal Reserve raised its interest rates on Wednesday against the backdrop of a tightening labor market and expansionary fiscal policy. The U.S. central bank forecast at least two more rate hikes this year, a sign that mortgage rates could rise further.

On Wall Street, the PHLX housing index rallied, outperforming a broadly firmer U.S. stock market. The dollar fell against a basket of currencies after the Fed rate decision and the Fed's economic outlook, while prices for U.S. government bonds were trading marginally lower.

PRICES ACCELERATING

While the number of previously owned homes on the market increased 4.6 percent from the prior month to 1.59 million units in February, housing inventory was down 8.1 percent from a year ago. Supply has declined for 33 straight months on a year-on-year basis. It was the lowest February inventory on record.

At February's sales pace, it would take 3.4 months to exhaust the current inventory. A six-to-seven-month supply is viewed as a healthy balance between supply and demand.

The median house price increased 5.9 percent from a year ago to $241,700 in February. That was the 72nd consecutive month of year-on-year price gains.

House price gains far outpace wage growth, which has been stuck below 3 percent on an annual basis despite the unemployment rate's being at a 17-year low of 4.1 percent. Labor market strength is fanning demand for housing.

"This one-two punch has created a situation in which existing sales appear to be plateauing at around 5.5 million sales per year, well below the 6 million or more we might otherwise expect to see," said Aaron Terrazas, senior economist at Zillow.

But the supply squeeze could ease a bit in the months ahead. The government reported last Friday that the number of single-family housing units under construction surged in February to the highest level since June 2008 while completions hit an almost 10-year high.

Still, economists expect supply to remain tight this year, which together with pricey home loans could result in modest home sales growth in 2018.

First-time buyers accounted for 29 percent of transactions in February, unchanged from January and down from 31 percent a year ago. Economists and Realtors say a 40 percent share of first-time buyers is needed for a robust housing market.

(Reporting by Lucia Mutikani; editing by Andrea Ricci and Leslie Adler)