The Commerce Department said new home sales rose 4.9 percent to a 950,000 annual rate, the biggest one-month jump since December 2000.
The increase in sales should boost consumer spending ahead, as new homeowners begin to furnish their houses. Consumer spending, which makes up two-thirds of U.S. economic activity, and housing have offset weakness in business investment this year.
While July's reading was stronger than the 918,000 rate that Wall Street analysts had been expecting, June and May sales were revised downward. June sales were revised to a 906,000 pace, down from a previously reported 922,000 rate, while May sales were revised to an 881,000 pace from 907,000.
The Northeast saw the biggest jump in sales in July, up 18 percent. The Midwest saw a 6.9 percent gain. Home sales in the South rose 2.3 percent while the West saw a 4.6 percent gain.
The supply of new homes on the market fell to 3.8 months from 4 months, also the lowest since March.
Measures of home prices fell slightly. The median new home price in July was $168,300, down from $172,400, while the average sale price fell to $208,400 from $208,600.