updated 1/27/2010 10:08:26 AM ET 2010-01-27T15:08:26

New home sales unexpectedly fell 7.6 percent last month, capping the industry's weakest year on record.

The Commerce Department said December sales fell to a seasonally adjusted annual rate of 342,000 from an upwardly revised November pace of 370,000. Economists surveyed by Thomson Reuters had forecast a pace of 370,000 for December.

The results were the weakest since March and indicated demand remains sluggish despite newly expanded tax incentives to spur sales.

Only 374,000 homes were sold last year, down 23 percent from a year earlier and the weakest year on records dating back to 1963. December's sales were nearly 9 percent below the same month last year.

Home sales have had a rocky recovery from their four-year slide. December's sales pace was up 4 percent from the bottom in January 2009, but down 75 percent from the peak in July 2005.

The median sales price of $221,300 in December was down nearly 4 percent from $229,600 a year earlier, but up about 5 percent from November's median of $210,300.

New home sales varied widely across the country. Sales of new homes plummeted by 41 percent in the Midwest and fell by 7 percent in the south. But they skyrocketed 43 percent in the Northeast and rose 5 percent in the West.

Experts forecast that any housing recovery this year will be slow and labored. The National Association of Home Builders forecasts sales of new and previously occupied homes to weaken after tax credits for homebuyers expire in April. But new home sales are expected to rise by more than one-third from last year's dismal levels.

Graph: New home sales
So far, the housing recovery has been fueled mainly by hundreds of billions in federal spending that has pushed down mortgage rates and propped up demand. Congress decided last year to extend a tax credit of up to $8,000 for first-time buyers until the end of April. Homeowners who have lived in their current properties for at least five years can claim a tax credit of up to $6,500 if they relocate.

There were 231,000 new homes for sale at the end of December, down about 2 percent from November and the lowest inventory level since April 1971. But at the current lackluster sales pace, that still represents 8 months of supply — above a healthy level of around 6 or 7 months.

John Freer, president of Riverworks Inc., a custom home builder in Missoula, Mont. who builds environmentally sustainable homes, said traffic and sales have been picking up. Along with the tax credit, he said, "I think people are a little bit more optimistic than they were last year."

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