New single-family home sales rose in October and the supply of homes on the market fell to its lowest level since April of last year, showing some healing in the battered housing sector.

The Commerce Department on Monday said that sales edged up 1.3 percent to a seasonally adjusted 307,000-unit annual rate, which was the fastest pace in five months yet still below analysts' expectations.

The supply of new homes in the market would last 6.3 months at the current pace of sales.

The data fueled hopes the market for homes could at least be bottoming out following the previous decade's boom and bust in the housing sector.

This looks like a bottom. The market is stabilizing, said Gregory Miller, an economist at Suntrust Bank in Atlanta.

Prices for U.S. stocks opened sharply higher on hopes that fresh proposals could be emerging out of Europe to help solve the region's debt crisis.

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Graphic - US new home sales: http://link.reuters.com/dym35s

Graphic - U.S. Midwest manufacturing: http://link.reuters.com/gem35s

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Europe's troubles are casting a pall over the economic outlook in the United States, which has made strides since the summer thanks to strong factory output and improved consumer spending.

Retail sales soared over the Thanksgiving weekend as shoppers scooped up discounted merchandise. Sales were record $52.4 billion, a 16.4 percent jump over the prior year, raising hopes consumer spending would be strong over the holiday season.

But falling home prices and tighter credit continue to be the bane of the recovery, which has progressed with fits and starts since the 2007-2009 recession.

The median sales price dropped 0.5 percent in October to $212,300, the lowest in a year, the Commerce Department said.

Falling prices could hamper the housing market by making buyers see homes as a bad investment. Still, compared to October last year, the median price was up 4.0 percent.

A housing market recovery has been frustrated by a glut of unsold properties and an unemployment rate that has been stuck around 9 percent.

Without a steady supply of credit and at least stable prices, a turnaround in the housing sector could still be some time away.

In a bid to shore up the sector, the government last month expanded its refinancing program to help homeowners who owe more than their houses are worth.

September's sales pace was revised slightly down to 303,000 units from the previously reported 313,000 units. Economists polled by Reuters had forecast sales at a 315,000-unit rate. In the 12 months through October, new home sales are up 8.9 percent.

The U.S. Federal Reserve has held short-term interest rates at nearly zero since 2008 and has expanded its balance sheet in a bid to get credit to businesses and households.

That has helped bring 30-year mortgage rates to record lows. The problem is that even with low rates, many would-be borrowers still cannot get a loan.

(Additional reporting by Richard Leong in New York)

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