I just tried in Access 2003 and observed the same thing. It's not a problem with screen refresh (this would have been handled by DoEvents anyway) because setting Me.Caption to something at the top of the handler is immediately visible.
On the other hand, when stepping through the code, the hourglass works, but the VB Editor is active at that time. I can only guess that images have a different mouse handling scheme than regular controls: the same happens for both image controls and unbound object frames.
Use conagraman's suggestion or place the image directly in the button (if you want that sort of look). I did not find a way to make the hourglass appear, even by changing the focus and other similar tricks, but I haven't tried WinAPI calls — I'm sure it's possible if you really need it.
(°v°)