Jan. 26 (Bloomberg) -- New home sales in the U.S. rose more than expected in December, showing the real-estate market is improving following its biggest slump since 1990.

The 4.8 percent increase to an annual pace of 1.12 million in December, the most since April, from a 1.069 million rate the prior month, the Commerce Department said today in Washington. For all of last year, sales dropped 17 percent, the biggest decline in 16 years, to 1.061 million from a record 1.283 million in 2005.

Buyers were lured back into the market after builders cut prices and sweetened incentives. Combined with more jobs, rising incomes and still-cheap mortgage rates, the sales increase may give companies such as Lennar Corp. reason to be more optimistic on the outlook for this year.

``There's a reasonable case to say we've reached the bottom, certainly on the demand side,'' said Haseeb Ahmed, an economist at JPMorgan Chase & Co. in New York, before the report.

Economists forecast the new home sales would rise to an annual rate of 1.052 million, from an originally recorded 1.047 million in November, according to the median of 67 forecasts in a Bloomberg News survey. Estimates ranged from a 1.015 million rate to 1.1 million.

Earlier today, the Commerce Department reported that durable goods orders rose 3.1 percent in December, after a 2.2 percent November gain. Excluding transportation, orders increased 2.3 percent, the most since March.

Median Prices

The median price of a new home fell 1.5 percent in December, to $235,000 from $238,600 a year earlier. The median price of $245,300 for all of 2006 was 1.8% higher than the previous year.

The number of homes for sale at the end of the month fell to 537,000, the fewest since January, from 542,000 in November. That left the supply of homes at the current sales rate at 5.9 months' worth, compared with 6.1 months in November.

Builders are offering more incentives, such as lower mortgage rates through their affiliates and free kitchen upgrades, to reduce inventory.

``We know that builders don't sit around with inventory on their books,'' said Julia Coronado, an economist at Barclays Capital in New York. ``One way they do that is by adding incentives and lower prices.''

Sagging home sales and increased contract cancellations caused builders in the second half of last year to reduce construction. Residential construction fell by the most in 15 years in the third quarter, restraining economic growth to an annual rate of 2 percent, the weakest this year. The Commerce Department is scheduled to release figures for the fourth-quarter on Jan. 31.

Compared with a year earlier, new home sales for December were down 11 percent, the government said today.

Regional Breakdown

Sales rose in three of four regions, led by 27 percent increases in both the Northeast and Midwest. Sales in the South rose 0.3 percent. They declined 4.4 percent in the West.

A report yesterday from the National Association of Realtors showed that sales of existing homes fell 0.8 percent in December to a 6.22 million pace.

New-home sales are considered a more timely barometer of the housing market because they are recorded when a contract is signed. Most sales of existing homes are counted when a contract closes, usually a month or two later.

Sales of existing homes may be depressed longer than those of new homes because builders are more likely to reduce prices and sweeten incentives to reignite demand, economists said.

Housing to `Stabilize'

The housing market is likely to ``stabilize,'' helping push economic growth this year to 2.5 percent or higher, Federal Reserve Bank of Kansas City President Thomas Hoenig said on Jan. 19.

Hoenig was among Fed officials who last week said the economy will weather the recent housing slump and that concerns about inflation were not abating. The Fed's Open Market Committee is projected to hold the benchmark overnight lending rate between banks at 5.25 percent for a fifth straight meeting next week.

Even with the stabilization in sales, housing probably won't contribute to economic growth this year, economists said. ``Demand has done okay but still builders have a little bit of a lingering inventory issue to work off,'' said Michael Gregory, a senior economist at BMO Capital Markets in Toronto. ``Residential construction is still going to be a slight drag.''

The government is scheduled to release advanced fourth- quarter gross domestic product figures on Jan. 31. Economists surveyed by Bloomberg earlier this month said growth this year will average 2.5 percent.

Lennar Corp., the fourth-largest U.S. homebuilder, said last week that profit may rise this year, helped by the robust economy. The Miami-based company reported its first quarterly loss in at least a decade for the three months ended Nov. 30.

Provided the ``current environment of strong employment, low interest rates and a healthy economy continues,'' Lennar will meet or exceed 2006 earnings, Chief Executive Officer Stuart Miller said in a Jan. 17 statement.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net

Last Updated: January 26, 2007 10:00 EST