The report showed the housing market is rebounding faster than expected from its historic bust as first-time buyers rushed to take advantage of a tax credit that expires this fall.

The National Association of Realtors said Tuesday its seasonally adjusted index of sales contracts signed in July for previously occupied homes rose 3.2 percent to 97.6. It was the sixth straight increase, and 12 percent higher the same month last year.

Economists surveyed by Thomson Reuters had expected the index to edge up to only 96.5.

The group projects that around 2 million first-time buyers will take advantage of the credit this year, and says it is spurring 350,000 additional sales that wouldn't have happened otherwise.

Meanwhile, stocks plunged on growing concerns that more banks will fail. Investors brushed off the housing report and news the U.S. manufacturing sector grew in August for the first time in 19 months. Analysts said much of the improving economic data already were priced in, following a six-month climb in stocks.

Analysts said there were other forces at work in the market, including lingering concerns about the Chinese economy, whose problems would affect the rest of the world.

All the major indexes fell more than 1.5 percent, including the Dow Jones industrials, which lost about 160 points. The biggest declines came from financial and energy companies.

Shares of homebuilders rallied in early trading, only to retreat with the broader market. Shares of DR Horton Inc. lost 43 cents, or 3.2 percent, to $12.98 in late afternoon trading Tuesday, after hitting a midday high of $13.86, while Lennar Corp. reached a daily high of $15.63 before sliding to trade down 52 cents, or 3.4 percent, at $14.63.

Hovnanian Enterprises Inc. shares fell 27 cents, or 5 percent, to $5.10 after trading at $5.75 earlier in the session, and Pulte Homes Inc. fell 45 cents, or 3.5 percent, to $12.33 after trading as high as $13.12.

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