New home sales plummeted in December, according to data released yesterday by the Commerce Department. The figures were significantly lower than expected, and bode poorly for America’s economic outlook, as the housing slump appears to be worsening.

The report showed that home sales for the 2007 calendar year dropped 26.4%, the largest annual decline since statistics were first recorded in 1963.

The “new home sales data echoed miserable signals from permits data in the fourth quarter, suggesting new home construction will continue to decline rapidly in the first half of 2008,” an economist for Citigroup Inc., Steven Wieting, wrote in a research report.

Sales of new single-family homes fell 4.7% in December, to the lowest monthly rate in nearly 13 years, while total new home sales were 57% lower than their peak in July 2007, according to the report. The government also said the median price of a new home grew by 0.2% during 2007, to $246,900, the smallest rise since prices dropped by 2.4% in 1991.

The dollar fell against major currencies on the news. Against the euro, the greenback declined to a nearly two-week low yesterday, of $1.4798 for 1 euro. The dollar also declined against gold yesterday, buying as little as 1/929th of an ounce.

Stocks moved slightly higher, however, as investors took the bad housing news to mean that further interest rate cuts from the Federal Reserve are almost certain. When the Fed cut interest rates last week by three-quarters of a percentage point, it hinted that signs of further weakening in the housing market would prompt it to make further rate cuts during its regular meeting on January 29–30.

The Dow Jones industrial average index closed up 176.72 points, at 12,383.89, a 1.45% increase, while the S&P 500 index rose 23.35 points, to 1,353.96, a 1.75% increase. The Nasdaq composite index also climbed 23.71 points, to 2,349.91, a 1.02% jump.

The chief U.S. economist at IDEAGlobal, Joseph Brusuelas, wrote in a research note, “If there was any doubt left, this report should just about close the case on an additional 50bps cut in the federal funds rate out of the FOMC when it meets on January 29–30.”

According to the report, 495,000 homes were for sale at the end of December, an inventory glut that would take more than nine months to clear at the current sales pace.

“December’s numbers were disappointing in every way. Sales and prices were down, inventories were up, and the sales estimates for November were revised down,” an American economist for Global Insight, Patrick Newport, wrote in a research note yesterday.

In a seemingly positive note, new home sales rose in the Northeast by 6% in December. However, according to an economist for JPMorgan Chase, Michael Feroli, the Northeast and the Midwest are “the two least important regions for home sales.” Poor numbers from the larger South and West regions, which both fell by about 6%, overshadowed relatively flat sales elsewhere.

Some are predicting that the housing market may start to recover soon, pointing to signs in yesterday’s report that frustrated homeowners are pulling their assets from the market.

Mr. Brusuelas is less optimistic. “We anticipate that what we are observing is a temporary lull in a storm that will rage on until later this year,” he writes. “Once the increasingly large number of foreclosures begin to appear on the market later this spring, this will act as a further factor, which should depress prices further.”