WASHINGTON (Reuters) - U.S. existing home sales increased to a 10-month high in December, but further gains are likely to be limited by elevated mortgage rates and house prices, which are keeping many prospective buyers on the sidelines.

Home sales rose 2.2% last month to a seasonally adjusted annual rate of 4.24 million units, the highest level since February, the National Association of Realtors said on Friday.

Economists polled by Reuters had forecast home resales would rise to a rate of 4.19 million units. Sales surged 9.3% on a year-on-year basis, the largest increase since June of 2021.

A total of 4.06 million previously owned houses were sold last year, the lowest number since 1995.

"Home sales in the final months of the year showed solid recovery despite elevated mortgage rates," said Lawrence Yun, the NAR's chief economist. "Job and wage gains, along with increased inventory, are positively impacting the market."

A survey from mortgage finance agency Fannie Mae on Wednesday predicted weak existing home sales in the first half of the year, noting that "new homes are now priced competitively with existing homes and are far more available." It forecast the popular 30-year fixed-rate mortgage would average 6.7% in the first quarter and edge down to 6.6% in the second quarter.

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 could fan inflation.

The Federal Reserve has scaled 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%.

Housing inventory fell 13.5% to 1.15 million units last month. Supply increased 16.2% from one year ago. The median existing home price shot up 6.0% from a year earlier to $404,400 in December, and hit a record high of $407,500 in 2024.

At December's sales pace, it would take 3.3 months to exhaust the current inventory of existing homes, up from 3.1 months a year ago. A four-to-seven-month supply is viewed as a healthy balance between supply and demand.

Properties typically stayed on the market for 35 days in December, compared to 29 days a year ago. First-time buyers accounted for 31% of sales versus 29% a year ago. They made up a record low of 24% in 2024. Economists and realtors say a 40% share is needed for a robust housing market.

All-cash sales constituted 28% of transactions last month, down from 29% a year ago. Distressed sales, including foreclosures, represented only 2% of transactions, unchanged from last year.