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Existing-home sales showed unexpected improvement in December, driven by much-reduced prices in the West and lower interest rates.

Home sales rose 6.5% to a seasonally adjusted annual rate of 4.74 million properties in December from 4.45 million in November, according to a report Monday by the National Association of Realtors (NAR). Economists had been predicting a drop of around 4%.

“It looks like, especially out West where prices are collapsing, that lower prices and lower mortgage rates are generating demand,” says Joel Naroff of Naroff Economic Advisors.

Sales rose 0.5% in September 2008; however, the December gain was the biggest since January 2002.

What’s behind the recent rise:

*Low prices. The uptick in sales was driven especially by home buyers in California, Nevada, Arizona, Florida and other distressed markets where home prices have tumbled. Those are also where foreclosure rates have been highest.

Sales were up 13.6% in the West, 7.4% in the South and 4.0% in the Midwest, but slipped 1.4% in the Northeast.

The national median home price was $175,400 in December, which is 15.3% below December 2007, when the median was $207,000.

*Lower interest rates. For those who qualify, interest rates are still at historic lows — making it a tantalizing time to buy. Interest rates on a 30-year, fixed loan were 5.12% for the week ended Wednesday, according to Freddie Mac.

Benjamin Roberts, 32, an account executive at e3communications, plans to close on an 1875 Italian-style fixer-upper in Buffalo next month.

“I’ve been looking for a while and it was scarier when the market started going down, but I got a 4.5% fixed rate,” says Roberts, a first-time buyer.

Sales could continue to rise if buyers’ insecurities are allayed by passage of an economic stimulus package, says Lawrence Yun, NAR chief economist.

Nevertheless, troubling signs persist. Mortgage applications as a whole decreased for the week ended Wednesday.

And despite the pickup in home sales, sales are still anemic: Existing-home sales in December were 3.5% below the 4.9 million pace in December 2007, NAR reports. For all of 2008, sales were 13% below transactions recorded in 2007.

Sales of existing homes plunged unexpectedly in January to the lowest level since 1997, a sign that even bargain prices weren’t enough to draw home buyers into the dismal housing market.

Existing home sales, which had been predicted to rise, tumbled 5.3% to an annual rate of 4.49 million in January, down from 4.74 million properties in December, according to a report Wednesday from the National Association of Realtors.

Home prices sank nearly 15% from a median of $199,800 a year ago to $170,300 in January. That was the second-largest drop in NAR records. Several factors are behind the slump:

*Foreclosure moratoriums. Many lenders — including mortgage giants Fannie Mae and Freddie Mac — have instituted moratoriums on foreclosures, which means sales of foreclosed homes have stalled.

“It’s somewhat of a surprise,” says Brian Bethune of IHS Global Insight, adding that the most recent report on pending home sales showed an increase. “But existing home sales are driven by foreclosures, and moratoriums on foreclosures will reduce the numbers. That was what had been driving some of the gains.”

*Housing rescue plan. Some wary buyers may have stayed out of the market last month, anticipating the Obama administration’s housing rescue plan could help them get a better deal.

President Obama announced the plan last week, and details about how it will work are expected next week.

The $75 billion plan, among other things, will include an up to $8,000 tax credit for first-time home buyers that many economists expect will help spur sales later this year.

“The economic situation deteriorated due to the jobless rate and consumer confidence,” says Lawrence Yun, chief economist at the National Association of Realtors. “But serious buyers wanted to know what was going to be in the stimulus bill before they signed a contract. They were waiting.”

*Interest rate volatility. So many issues are in flux, including weekly volatility in interest rates and uncertainty about the effect of Obama’s housing affordability plan, that indicators such as home sales are reflecting ongoing uncertainty about the housing market.

Mortgage applications dropped 15.1% for the week ended Feb. 20, and refinancing activity also declined 19%, according to a Wednesday report by the Mortgage Bankers Association.

The average interest rate for 30-year, fixed mortgages increased to 5.07% from 4.99% the week earlier.

Earlier reports showed home sales had been on the rise.

NAR’s previous report found existing home annual sales rate rose 6.5% to 4.74 million in December from 4.45 million in November.

In the latest sign that the battered housing market is healing, sales of new homes in June jumped a bigger-than-expected 11% from May, and the inventory of new homes for sale continued to shrink.

Sales of new homes, driven largely by lower prices and mortgage rates, sold at a seasonally adjusted annual rate of 384,000 units last month, vs. 346,000 in May. It was the third month in a row of higher sales and the most robust sales pace since November 2008, which had an annual sales rate of 390,000 new homes, according to figures released Monday by the government.

Perhaps more important, the months supply of homes for sale fell to 8.8 months in June, down from 10.2 in May and the lowest monthly supply since October 2007. Housing experts said that is a sign that the inventory overhang that has put downward pressure on prices is abating somewhat. The “months supply” inventory yardstick is the amount of time it would take to sell the 281,000 unsold new homes now on the market at current sales rates.

While median new home prices continued to fall last month, dipping 12% from a year ago to $206,200, and are unlikely to stop falling until late in 2009 at the earliest, market watchers were upbeat about the drop in inventories of homes for sale.

“We are finally working through this excess inventory,” says Randall Guttery, professor of real estate at the University of North Texas. “Once we get that excess inventory taken off the market, we can get back to a more healthy supply-and-demand-driven market.” A supply of six to seven months of new homes for sale is deemed a healthy balance between buyers and sellers.

Sales got a boost from a government program that offers a federal tax credit up to $8,000 for first-time home buyers that close before the end of November.

The trend toward better housing data has raised hopes that the worst of the slump is finally over.

“Evidence is mounting that we have turned the corner for sales, and that is a precursor for a recovery,” says Bernard Markstein, senior economist at the National Association of Home Builders.

Despite recent signs of stabilization, the housing market still faces obstacles, says Andres Carbacho-Burgos, economist at Moody’s Economy.com. “The housing recovery is tied to the ongoing recession and job market and depends on the health of the banking system,” he says.