Sales of previously owned homes rose sharply in September to their highest level in two year, according to a report from a leading trade association released Friday.

Existing home sales rose 9.4 percent in September to 5.57 annualized units from a 5.09 annualized pace in August according to a report issued by the National Association of Realtors. The September home sales pace was the strongest since August 2007. Existing home sales in September was 9.2 percent higher than the 5.1 million-unit pace posted in September 2008.

The median price of existing homes sold in September was $174,900, 8.5 percent less from a year earlier. September’s single-digit price drop was an improvement over the year over year 12.5 percent price drop in registered in August.

On the supply side, the inventory of existing homes available for sale dropped 7.5 percent to 3.63 million homes compared to a month earlier. As a result, the months’ supply plunged to 7.8 in September compared to a 9.3 months’ supply in August. The months’ supply measures the number of months it would take to deplete the entire inventory of existing homes at the current sales pace.

Regionally, the West experienced the strongest gains in home sales followed by the Midwest, the South and the Northeast. Existing home sales rose 13 percent in the West compared to the previously month while sales in the Midwest, South and Northeast rose by 9.6 percent, 9 percent and 4.4 percent, respectively.

According to the association, foreclosures sales comprised 29 percent of total sales in September compared to a 31 percent share of total sales posted in August.

The September home sales report was received favorably by the housing markets and represents one more piece of evidence that the nation’s housing sector is recovering. All three major measures of existing home sales activity-sales pace, inventories and home prices-are at their most favorable levels in over a year.

However, market optimism should be tempered a bit. Much of the September gains in sales have to do with the $8,000 first-time homebuyer tax credit. The credit expires at the end of November and it is believed that a meaningful number of first-time buyers rushed to purchase homes in September an anticipation of the credit expiring. According to a National Association of Realtors survey, it is estimated that over 45 percent of existing homes sales during the past year were first-time home buyers.

Looking forward, improving market fundamentals are expected to help home sales. Affordability measures are hovering near record highs thanks to falling home prices and historic low mortgage rates. The economy is also rebounding, slowing the pace of job losses. However, all eyes are focused on whether Congress will extend the first-time homebuyer tax credit. If the credit is not extended, many housing pundits believe that home sales activity could stall.