NEW YORK (CNNMoney.com) - Sales of new homes rose 2.9 percent in December, a government report showed Friday, exceeding Wall Street's estimates.

The Census Bureau reported that the annual pace of new home sales increased to 1.27 million in December from 1.23 million in November, which was revised slightly lower. Economists surveyed by Briefing.com had forecast sales would slow to a 1.23 million annual rate.

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While home sales gained ground in December, there are still signs suggesting a cool down in the real estate market, said Gus Faucher, director of macroeconomics at Moody's Economy.com.

"I don't think month-to-month fluctuations are that important. I think we are still going to see a gradual slowing in the housing market over the rest of this year and into 2007," he said.

Mortgage finance firm Freddie Mac said the average rate on 30-year, fixed-rate mortgages eased in December to 6.27 percent from 6.33 percent in November, lowering the cost of buying a new home.

But rates are still up from an average 5.71 percent at the beginning of last year.

A general uptick in mortgage rates, along with weakness in economic growth and slowing existing home sales, are just some of the factors that point to an overall cooling in the housing market, Faucher said.

The Commerce Department said Friday that gross domestic product, the broadest measure of the nation's economic activity, slowed to an annual growth rate of 1.1 percent in the fourth quarter, down from a 4.1 percent rate in the third quarter.

Much of the nation's economic growth has been tied to the housing boom, which has created jobs in construction as well as spurred purchases of big-ticket household items such as refrigerators and washing machines.

Earlier this week, the National Association of Realtors reported the third straight month of slowing existing home sales. New home sales, while a small part of the housing market, are seen as a leading indicator of sales.

Weaker confidence among homebuilders and a gradual slowing in home price appreciation offer additional signs of the cooling trend, Faucher said.

Surveys from the National Association of Home Builders have shown a declining level of confidence among home builders, some of whom are even using incentives like free trips to Las Vegas to attract buyers.

The latest Census Bureau report shows median prices for new residences sold in December fell 1.5 percent from the previous month to $221,800. Half of the homes sold for more than the median, the rest for less.

The average home price declined 3.7 percent to $272,900.

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