NEW YORK (Reuters) - Home prices racked up their biggest annual gain in more than seven years in May, with more increases expected through the summer months as the sector continues to mend, data analysis firm CoreLogic said on Tuesday.

Prices rose 2.6 percent from April and were up 12.2 percent compared to May last year, the biggest year-over-year increase since February 2006, CoreLogic said.

Excluding distressed sales, prices were up 11.6 percent on a yearly basis. Distressed sales include properties that have been seized by lenders and short sales, where the struggling homeowner is allowed to sell the property for less than the outstanding mortgage.

The recovery in the housing sector has gained momentum this year, with tight inventory pushing prices higher. Still, prices nationally remain cheap compared to during the housing boom, which has spurred demand from investors and homeowners.

The acceleration in prices compared to a year ago was in line with the closely watched S&P-Case/Shiller report which showed prices rose more than 12 percent on an annual basis in April.

"Across the country, pent up demand and continued low interest rates are fueling strong demand for a limited inventory of properties," Anand Nallathambi, CoreLogic's chief executive officer, said in a statement.

"We expect that trend to continue to drive up prices throughout the balance of the summer months."

The report forecast prices will rise by another 2.9 percent in June for a yearly gain of 13.2 percent.

Nevada saw the biggest price increases, followed by California, Arizona, Hawaii and Oregon.

(Reporting by Leah Schnurr; Editing by Chizu Nomiyama)

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