Home sales tick up but job cuts deepen gloom

A bent over sign advertising a home for sale is shown in Daly City, California December 31, 2008.

WASHINGTON (Reuters) - An unexpected improvement in U.S. home sales provided a rare dose of good economic news on Monday, but companies continued to wield the axe on jobs as the year-long recession inflicted more pain.

The pace of sales of previously owned homes rose for the first time since September and inventory declined, a bit of positive news amid a U.S. housing market crash that has chilled growth, sent unemployment soaring and sharply eroded household wealth.

The relentless wave of layoffs continued on Monday. Heavy equipment maker Caterpillar Inc announced nearly 20,000 job cuts and drugmaker Pfizer Inc, which announced plans to acquire rival Wyeth for $68 billion, said it would reduce its combined work force of about 130,000 by 15 percent.

Sales of previously owned U.S. homes increased 6.5 percent to a 4.74 million unit annual rate in December, the National Association of Realtors said. Analysts polled by Reuters had expected sales to set a 4.40 million unit pace.

Analysts said the uptick was encouraging and might be a signal the worst housing bust in decades was finally nearing a bottom following government steps to slow foreclosures and cut interest rates on home loans.

"Though unlikely to mark the bottom of the housing downturn, the report at least suggests the market is not spiraling downwards in response to mounting job losses and tightening credit standards," said Sal Guatieri, an economist at BMO Capital Markets in Toronto.

"An upward trend in home sales that gobbles up supply and stabilizes prices would be an important signpost of economic recovery, but that is likely still some ways off."

The surprise rise in home sales overshadowed steep job cuts from Caterpillar and other companies helped to lifted U.S. stocks. The Dow Jones industrial average ended up 38.47 points at 8,116.03, and the Dow Jones index of home builders' stocks rose 2.7 percent.

U.S. government bond prices and the dollar fell as the housing data eroded their safe-haven appeal, encouraging investors to seek riskier assets.

Stability in the U.S. housing market, the root cause of the worst financial crisis since the Great Depression, is seen key for any recovery in the domestic economy which has been stuck in recession since December 2007.

FORECLOSURES DRIVE SALES

December existing-home sales were largely driven by distressed sales, which dragged the median national home price down 15.3 percent from the year earlier to $175,400.

The chief economist of the National Association of Realtors, Lawrence Yun, said it was the largest price drop since NAR started keeping records in 1968 and probably the largest since the Great Depression.

"There is pent-up demand, which could be unleashed with the right stimulus. The Obama administration and Congress need to move fast ... to stabilize home prizes and set the foundation for a sustainable economic recovery," said Yun.

President Barack Obama is drumming up support for a $825 billion spending package, which he hopes will kick-start the economy and create or preserve 3 million to 4 million jobs.

Analysts were also heartened by the 11.7 percent drop in the inventory of existing homes for sale to 3.68 million units from 4.16 million in November.

That translated into 9.3 months of supply at December's sales pace. The supply stood at 11.2 months' worth in November.

"It suggests we are working through some of the inventory, which is the first thing to happen before we see any kind of housing recovery," said Frank Lesh, futures analyst at FuturePath Trading in Chicago.

"Until we work through the supply that's out there, it's going to be hard to see anything turn. The low rates the Fed has engineered is starting to create some demand, which is what we wanted to see."

Separately, the Conference Board said its index of leading economic indicators rose 0.3 percent, beating analysts forecast for a 0.3 percent decline.

Economists attributed the rise in the Conference Board's index of leading economic indicators to the improvement in credit markets thanks to action by the Federal Reserve.

The U.S. central bank has cut interest rates almost to zero and pumped hundreds of billions of dollars into financial markets to keep them operating.

The Fed meets on Tuesday and Wednesday and is expected to hold its target range for the key overnight federal funds rate steady at zero to 0.25 percent.

Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co., reckons that given the recent uptick in government bond yields and mortgage rates, the Fed could place emphasis on its plans to buy mortgage securities and possibly Treasuries.

(Additional reporting by Lisa Lambert in Washington, Deepa Seetharaman and Franklin Paul in New York; writing by Lucia Mutikani and Alister Bull; Editing by Leslie Adler)