First-time homebuyers made up just 32 percent of sales.

First-time buyers are critical to strong housing markets and normally make up about half of all sales. Their purchases of low and moderately priced homes also allow sellers to move up to pricier homes.

Bigger down payments, tougher lending rules, high debt and a shortage of desirable starter homes have kept many would-be buyers away. Even people with good credit and enough money for a down payment are holding off because they are worried home prices will keep falling.

Foreclosures and short sales -- when a lender agrees to sell for less than what is owed on a mortgage -- made up about 29 percent of all home sales last month. That's up from about 10 percent in past years. And a wave of foreclosures are being held up, either by backlogged courts or lenders awaiting state and federal probes into troubled foreclosure practices. Investors have targeted foreclosures and other deeply discounted properties. Their purchases accounted for 18 percent of sales in July.

The median sales price fell in July to $174,000, according to the Realtors' group. June's large jump in sales prices was attributed to missing data that had not been collected from Phoenix, which has been hit hard by foreclosures and dropping prices. Most economists say home prices will keep falling, by at least 5 percent, through the rest of the year. Many forecasts don't anticipate a rebound in prices until at least 2013.

Sales were uneven across the country. They rose 2.7 percent in the Northeast and 1 percent in the Midwest. They fell 1.6 percent in the South and 12.6 percent in the West.

The glut of unsold homes declined slightly in July to 3.65 million homes. At last month's sales pace, it would take 9.4 months to clear those homes. Analysts say a healthy supply can be cleared in six months.