By Will Parker and Sarah Chaney 

Home sales hit their high mark for the year in December, a sign that favorable mortgage rates and low unemployment are starting to lure more house hunters back into the market.

Sales of previously owned homes increased 3.6% in December compared with November to reach a seasonally adjusted annual rate of 5.54 million, the National Association of Realtors said Wednesday.

Compared with a year earlier, December sales of existing homes were up 10.8%, though December 2018 was a particularly weak month for sales and economic uncertainty around the federal government shutdown caused some buyers to delay purchases, NAR found.

Now, after a slow start to the year, the second half of 2019 showed a pickup in activity that brought total sales for the year to 5.34 million, the same pace as in 2018.

That is giving the housing market fresh momentum going into 2020, especially with the economy continuing to grow and borrowing rates remaining attractive. The average interest rate on a 30-year xed mortgage was 3.65% as of Jan. 16, according to Freddie Mac, down from 4.45% a year ago.

"Would-be buyers are likely to stay optimistic," said Zillow economist Matthew Speakman.

While inventory remains tight, there are some encouraging signs that home building is picking up. Housing starts hit a 13-year high in December. And home-builder sentiment in December, as measured by the National Association of Home Builders, was higher than it has been during any month since 1999.

For some home buyers, it has simply taken all year to find a deal that makes sense.

Alisa Knapp, 31 years old, and her husband, Howard, had been looking for a home in the range of about $500,000 in Portland, Ore., last spring, but were repeatedly outbid and decided to suspend their search. They set out again this fall with a new approach: increase their budget and find a home with extra units that can be rented out, to help cover the higher mortgage cost.

The Knapps closed on a triplex in the Boise neighborhood of Portland last month. They were able to factor in expected rental income on their mortgage, and as first-time home buyers, they took advantage of the low down payment allowed for mortgages backed by the Federal Housing Administration.

"There's a decent amount of risk," Ms. Knapp said of her new life as both homeowner and landlord. "But hopefully over the next few years we can stabilize it."

Despite the ramp up in sales, some economists remain cautious about whether activity can remain this strong. Home buyers across the country are finding very few options on the market that meet their expectations and their price targets.

Though demand is high, there was only a 3.0-month supply of homes on the market at the end of December, compared with 3.7 in November and in December 2018. December's inventory was the lowest for NAR records tracing back two decades.

That limited housing stock is contributing to higher home prices, with the median sales price for an existing home in December up 7.8% on year to $274,500. Inventory has been particularly tight at the cheaper end of the market, restraining sales. Inventory for homes priced below $100,000 declined 14.3% in December from a year earlier.

"It is remarkable to see this juxtaposition of high home sales and low inventory," said Brad Hunter, managing director of real estate advisory firm RCLCO. "In my opinion, we would see even more transactions happening if inventory were not so tight."

Though the pace of price acceleration had been slowing in recent months, the December figures indicate that trend could be reversing, said Mr. Speakman of Zillow.

NAR's chief economist, Lawrence Yun, also said that price growth is a cause for concern next year.

"Areas that are relatively unaffordable or declining in affordability are starting to experience slower job growth," he said. "The hope is for price appreciation to slow in line with wage growth, which is about 3%."

December home sales varied greatly with geography, according to NAR's report. The strongest markets were the Northeast and the South, while in the Midwest sales actually decreased 1.5%.

News Corp, parent of The Wall Street Journal, operates Realtor.com under license from the National Association of Realtors.

Write to Will Parker at will.parker@wsj.com and Sarah Chaney at sarah.chaney@wsj.com

(END) Dow Jones Newswires

January 22, 2020 16:09 ET (21:09 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.