New single-family home sales raced to their highest level in eight months in December while prices were the highest since April 2008, raising cautious optimism for a housing market recovery.

The Commerce Department said on Wednesday sales jumped 17.5 percent to a seasonally adjusted 329,000 unit annual rate after a downwardly revised 280,000-unit pace in November.

Economists, who had expected new home sales rise to a 300,000-unit pace last month, took the fairly upbeat report as a tentative sign of a turnaround in the troubled housing market. November sales were previously reported at a 290,000 unit rate.

Things are definitely perking up, but there is a question whether it's sustainable, said Brian Bethune an economist at IHS GlobaL Insight in Lexington, Massachusetts.

U.S. stocks rose slightly, while Treasury bond prices slipped modestly after the home sales data. The dollar was little changed.

The report is the latest in a series to suggest the economic recovery is gaining strength and broadening out.

Federal Reserve officials are expected to nod to the improving economic outlook at the end of a two-day meeting later on Wednesday, but remain firmly committed to the $600 billion bond buying program to aid the recovery.

Data last week showed a surge in sales of previously owned homes in December, but progress could be frustrated by a glut of homes from an unrelenting wave of foreclosures.

But the new home sales report showed supply is gradually being reduced as sales rise. The supply of new homes on the market fell to 6.9 months' worth, the lowest since April, from 8.4 months' worth in November.

There were 190,000 new homes available for sale in December, the lowest in 43 years.

We haven't found a bottom yet and the best we can say is that perhaps we will find it this year, said Michael Woolfolk, a senior currency strategist at BNY-Mellon in New York.

The median sales price for a new home increased 12.1 percent last month from November to $241,500, the highest since April 2008. Compared with December last year, the median price rose 8.5 percent, the biggest increase since August.

Separately, applications for home mortgages, seen as a gauge of home demand, slumped last week as bankers recorded the slowest refinancing activity in more than a year. The Mortgage Bankers Association's index of mortgage application activity dropped 12.9 percent in the week ended January 21.

(Reporting by Lucia Mutikani, Editing by Neil Stempleman)