WASHINGTON - Home sales in December reached their highest pace in nearly a year. The gain coincided with other signs that the troubled housing market improved at the end of last year.

Analysts cautioned that sales remain historically low and that it will take years for the home market to return to full health.

Still, the third straight monthly sales increase was encouraging. And economists noted that conditions are in place for further gains this year.

Prices have declined. Mortgage rates have never been lower. Homebuilders are slightly more hopeful because more people are saying they might be open to buying this year. And home construction picked up in the final quarter of last year.

"There's no denying that home sales are still very low and will remain low for a few years," said Paul Dales, an economist with Capital Economics. "But after having risen in each of the last three months ... it is clear that a housing recovery is now well under way."

Sales of previously occupied homes rose 5 percent to a seasonally adjusted annual rate of 4.61 million in December, the National Association of Realtors said Friday. It's the best level since January 2011.

For all of 2011, sales totaled only 4.26 million. That's up slightly from 4.19 million in the previous year. But it's far below the 6 million that economists equate with healthy housing markets. In 2005, at the peak of the boom, 7.1 million homes were sold.

Hiring has improved, which is critical to a housing rebound. Fewer people sought unemployment benefits last week than at any time in nearly four years, evidence of far fewer layoffs. The unemployment rate fell in December to its lowest level in nearly three years.

"With layoffs slowing sharply, hiring rising and consumers' confidence rebounding, the pre-conditions for a sustained recovery are falling into place," said Ian Shepherdson, chief U.S. economist for High Frequency Economics. "Sales and starts will keep rising; prices should stabilize, more or less."

The median sales price of a previously occupied home ticked up 0.3 percent from November to December to $164,500.

The supply of homes has declined, though it's still historically high at 2.38 million. At last month's sales pace, it would take nearly seven months to clear those homes.

If the supply continues to fall, prices could rise, more sellers would put homes on the market and more people would likely consider buying, said Pierre Ellis, an analyst at Decision Economics.

Still, the industry appears years away from fully recovering from its bust four years ago. Since the bubble burst, sales have slumped under the weight of foreclosures, tighter credit and falling prices.

Fewer first-time buyers, who are critical to a recovery, are in the market for a home. Purchases among that group fell last month to just 31 percent of sales. That's down from 35 percent in November. In healthy markets, first-time buyers make up at least 40 percent.

Homes at risk of foreclosure made up a third of sales last month. In strong markets, they make up only about 10 percent of sales.

And many deals are collapsing before they close. One-third of Realtors say they've had at least one contract scuttled in December, November or October. That's up from 18 percent in September.

Among the reasons why contracts have been canceled: Banks have declined mortgage applications. Home inspectors have found problems. Appraisals showed that a home was worth less than the bid. Or a buyer suffered a financial setback before the closing.

Still, sales rose across the country in December. They rose on a seasonal basis by more than 10 percent in the Northeast, 8.3 percent in the Midwest, 2.9 percent in the South and 2.6 percent in the West.