WASHINGTON (Reuters) -Sales of new U.S. single-family homes increased more than expected in December, further evidence that housing market activity regained momentum at the end of 2024, though rising mortgage rates remain a constraint.

The report from the Commerce Department on Monday also showed the rebound in home sales in November was much stronger than initially estimated. It added to data this month showing single-family housing starts and building permits increased to a 10-month high in December, while sales of previously owned houses also rose to the highest level since February.  

"New home sales in December wraps up a solid year for newbuild demand in an otherwise stagnant housing market," said Thomas Ryan, North America economist at Capital Economics. "We expect new home sales to continue to grind higher this year."

New home sales rose 3.6% to a seasonally adjusted annual rate of 698,000 units last month, the Commerce Department's Census Bureau said. The sales pace for November was revised higher to a rate of 674,000 units from the previously reported 664,000 units.

Economists polled by Reuters had forecast new home sales, which account for about 15% of U.S. home sales, would rise to a rate of 675,000 units. New home sales are counted at the signing of a contract, and can be volatile on a month-to-month basis. They increased 6.7% on a year-on-year basis in December.

An estimated 683,000 new homes were sold in 2024, up 2.5% compared to 2023. The median new house price increased 2.1% to $427,000 in December from a year earlier. The pace of increase in home prices is slowing amid rising inventory of new homes.

Residential investment, which includes homebuilding and sales, likely rebounded in the fourth quarter after being a drag on gross domestic product for two straight quarters.

MORTGAGE RATES

The housing market has been undercut by high mortgage rates, though new home sales have fared better because of still tight inventory of previously owned houses for sale.

Mortgage rates increased late last year in tandem with U.S. Treasury yields, which have jumped amid economic resilience, especially in the labor market, and investor worries that President Donald Trump's plans for tax cuts, broad tariffs and mass deportations of undocumented immigrants could stoke inflation.

The Federal Reserve has dialed back its projected interest rate cuts for this year to only two from the four it estimated in September, when it launched its policy easing cycle. The average rate on a 30-year fixed-rate mortgage is just below 7%.

The government is scheduled to publish its first GDP growth estimate for the fourth quarter on Thursday. A Reuters survey of economists showed GDP increased at a 2.7% annualized rate last quarter. The economy grew at a 3.1% pace in the third quarter. It is expanding well above the 1.8% rate that Fed officials regard as the non-inflationary growth pace.

New home sales soared 41.7% in the Northeast and surged 20.3% in the West. But they dropped 2.1% in the densely populated South and fell 3.3% in the Midwest.

A survey from mortgage finance agency Fannie Mae last week forecast new home sales would rise further this year, noting that they were "now priced competitively with existing homes and are far more available." Builders have been constructing smaller and more affordable homes to woo buyers. 

The inventory of new homes last month jumped to 494,000 units, the highest level since December 2007, from 488,000 units in November. About 54% of the housing inventory was under construction while 24% of the units were completed and the remaining 22% were homes yet to be built.

At December's sales pace it would take 8.5 months to clear the supply of houses on the market, down from 8.7 months in November.