WASHINGTON (Reuters) - Sales of previously owned U.S. homes fell more than expected in December, ending a year that brought the sharpest housing slowdown since 1982 and the first annual drop in prices since the Great Depression.
But as the economy has taken a hit from the housing slump and credit crisis, the labor market over the past few weeks has been holding steady, leaving economists in a quandary over how far the world's richest economy will sink.
"I think the economy is pretty darn weak, but you can't declare that we are in a recession yet," said Robert MacIntosh, chief economist at Eaton Vance Corp in Boston.
U.S. government bond prices fell on the stronger-than-expected job data, while U.S. stocks jumped in late afternoon trading.
But investors were focusing on the details of a stimulus package designed to stave off a recession. The plan, worked out between the Bush administration and lawmakers, would include up to $1,200 in tax rebates for married couples and tax incentives for businesses.
Meanwhile, Labor Department data on Thursday showed that the number of U.S. workers applying for jobless benefits fell unexpectedly last week to the lowest level in four months. That led economists to believe the unemployment picture at the start of this year will be better than it seemed a month ago.
"The data seems to be suggesting a stronger payroll in January after the weak December," said David Sloan, senior economist at 4Cast Ltd in New York.
A mere 18,000 new jobs were created in December, intensifying speculation that U.S. growth would slacken and turn negative.
But even with a fairly steady labor picture, an end to the housing crisis is still not in sight.
Data out from the National Association of Realtors on Thursday showed a 2.2 percent drop in sales of previously owned homes during December to the slowest pace in nearly a decade.
For the year, sales of single-family homes -- the bulk of the homes covered in this data -- were down 13 percent, the biggest downward spiral since 1982.
FIRST ANNUAL DROP IN HOME PRICES
The national median price of a single-family home fell 1.8 percent in 2007. It was the first recorded annual price decline since the Realtor group began tracking home sales data in 1968, but officials there say it is also the first annual decline since the 1930s when the economy was in the throes of the Great Depression, its biggest economic downturn in history.
While a decrease in home prices is likely to help shave some excess from the bloated inventories of unsold homes and eventually bring the housing slump to an end, economists warn that falling home prices could cut into consumer spending.
"The decline in home prices is clearly negative for household net worth and consumer spending. If it's matched with a similar drop in the equity market, it will begin to take a toll," said Richard DeKaser, chief economist at National City Corp in Cleveland.
Still, he called December's 7.4 percent decrease in inventories to 3.91 million units at month's end a good sign. That represents a 9.6-month supply of existing homes at the current sales pace, down from the 10.1-month supply in November.
"It's encouraging to see the pare-down in excess," DeKaser said.
The climate for buying homes has improved with lower prices and historically low rates on 30-year fixed rate mortgages, according to Lawrence Yun, the Realtor group's chief economist.
"Wall Street made a big gamble," Yun said of the subprime mortgage market debacle, adding that for home buyers, conditions are good.
Interest rates on 30-year mortgages have fallen to an average of 5.48 percent, the lowest since 2004, according to the latest survey from Freddie Mac. A year ago, they averaged 6.25 percent.
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