* Home sales rise 5 percent to 11-month high
* Supply of homes on the market lowest since 2005
* Prices fall 2.5 percent from year-ago
By Lucia Mutikani
WASHINGTON, Jan 20 (Reuters) - U.S. home sales hit an 11-month high in December and the number of properties on the market was the fewest in nearly seven years, pointing to a nascent recovery in the housing sector.
The National Association of Realtors said on Friday existing home sales increased 5 percent to an annual rate of 4.61 million units, with all four of the nation's regions recording gains.
Sales of both multifamily and single-family homes rose.
"It seems that the housing sector may be slowly picking itself up off of the mat," said Omair Sharif, an economist at RBS in Stamford, Connecticut.
The fairly upbeat data and reports that debt-stricken Greece was close to a deal with its private-sector creditors pushed U.S. Treasury debt prices lower. Stocks on Wall Street were mixed, while the dollar was little changed against a basket of currencies.
While the home sales pace was a touch below economists' expectations, December marked the third straight month of gains, adding to hopes that a tentative recovery was taking shape.
But a glut of unsold properties that is weighing down on prices and stringent lending practices by banks is likely to make progress painfully slow.
SHADOW INVENTORY WORRIES
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 down from a 7.2 months' supply in November.
The Realtors group noted, however, that the inventory of unsold homes tends to decline in winter.
A supply of 6 months is generally considered ideal and anything higher suggests prices will decline further.
The median sales price fell 2.5 percent to $164,500 in December from a year ago. For 2011 as a whole, prices dropped 3.9 percent to an average of $166,100, the lowest since 2002.
Further pressure could come in the months ahead as banks finish working out kinks in the foreclosure process and push more homes onto the market.
"That so-called 'shadow' inventory has to come to the market eventually and will keep downward pressure on home prices long after a pickup in building and sales activity," said Ellen Zentner, a senior economist at Nomura Securities in New York.
LOOKING TO HELP
The Federal Reserve has suggested a number of ways other policymakers could step in to help the beaten-up market, including giving government-controlled mortgage finance firms Fannie Mae and Freddie Mac a bigger role in refinancing loans.
Some officials at the Fed say the central bank should consider further purchase of mortgage-backed securities as a way to help spur a stronger recovery, but no action is expected at a policy meeting next Tuesday and Wednesday.
The data on previously owned homes was just the latest in a number of signals on housing to show improvement, gains economists pinned to an improving labor market.
Data earlier 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.
"It is very encouraging that the current phase of the recovery is being driven by economic fundamentals as opposed to being fostered by temporary stimulus," said Millan Mulraine, a senior macro strategist at TD Securities in New York.
Existing home sales in December were up 3.6 percent from a year earlier. A total of 4.26 million homes were sold last year, up 1.7 percent from 2010.
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.
"There is every reason to believe that banks are not going to reduce credit standards back to pre-recession days, when all that was required was the ability to fog a mirror - and only a faint fog was necessary," said Steven Blitz, a senior economist at ITG Investment Research in New York.
"This, plus the slow pace of the upturn, will keep the housing market from a dynamic turn. It is, however, increasingly safe to say the market has finally turned positive." (Reporting by Lucia Mutikani; Editing by Andrea Ricci)