* Home sales rise 5 pct to 11-month high
* Supply of homes on the market lowest since 2005
* Prices fall 2.5 pct from year-ago
WASHINGTON, Jan 20 (Reuters) - Sales of previously owned U.S. homes rose to an 11-month high in December and the supply of properties on the market tumbled to a near 7-year low, pointing to a nascent recovery in the housing market.
The National Association of Realtors said on Friday existing home sales increased 5 percent month over month to an annual rate of 4.61 million units.
November's sales pace was revised down to a 4.39 million-unit pace, previously reported as a 4.42 million-unit rate.
Economists polled by Reuters had expected sales to rise to a 4.65 million-unit sales pace. Sales in December were up 3.6 percent from a year ago. A total of 4.26 million homes were sold in 2011, up 1.7 percent from the prior year.
"A sector of the economy that has been a large weight on growth has started to stabilize over the last few months and we will continue to look for momentum in 2012," said John Doyle, currency strategist at Tempus Consulting in Washington.
The third straight month of gains in sales added to hopes that a tentative recovery in the housing market was starting to take shape, but progress will be painfully slow given a glut of unsold properties that is weighing down on prices.
Data this week showed single-family home starts rose for a third straight month in December and optimism among builders this month was the highest in four-and-a-half years.
But the sector, responsible for the 2007-09 recession, remains challenged by an oversupply of homes amid an 8.5 percent unemployment rate. In addition, declining prices have left many Americans with homes that are worth less than their mortgages.
But there are tentative signs of improvement. There were 2.38 million unsold homes on the market last month, the fewest since March 2005. That represented a 6.2 months' supply at December's sales pace, the lowest since April 2006, and compared to 7.2 months' supply in November.
However, the inventory of unsold homes tends to decline in winter. A supply of 6 months is generally considered as ideal and anything above indicates further declines in house prices. The median sales price fell 2.5 percent to $164,500 from a year ago.
Sales last month rose across all four regions, with gains in both the multifamily home and single-family home segments.
Single family home sales rose 4.6 percent, while multi-family dwellings advanced 8.7 percent.
But the road to recovery will be bumpy. Distressed properties, foreclosures and short sales which typically occur at deep discounts, accounted for 32 percent of overall sales last month, little changed from November.
A third of pending existing home sales contracts were canceled, the NAR said. (Reporting by Lucia Mutikani)
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