By Kate Gibson

While focused in part on quarterly earnings and a report showing a drop in consumer confidence, investors also found themselves basking Tuesday in the afterglow of surprisingly positive data on the U.S. housing market.

"When was the last time we've had good news on the housing market? You really can cut prices to the point where volume will move," said Owen Fitzpatrick, head of U.S. equity group at Deutsche Bank, of the unexpected December increase in sales of existing homes reported Monday.

The National Association of Realtors said there had been a 6.6% rise in existing-home sales in December, with analysts chalking up the drawdown in inventories to price discounts on foreclosed properties, along with declining mortgage rates. .

"It appears some buyers are taking advantage of much lower home prices. Buyers will continue to have an edge over sellers for the foreseeable future," said Lawrence Yun, the Realtors' chief economist.

On Tuesday, major stock indexes meandered in and out of positive territory before closing with modest gains. Health care, financials and information technology paced the gains, while telecommunication services and consumer discretionary shares lagged.

The Dow Jones Industrial Average (DJI) rose 58.7 points, or 0.7%, to 8,174.73. The S&P 500 (SPX) climbed 9.14 points, or 1.1%, to 845.71, and the Nasdaq Composite (RIXF) added 15.44 points, or 1%, to 1,504.9.

"Outside of financials, the market is reacting fairly well to a pretty dismal earnings season," said Fitzpatrick.

Equities investors offered little or no reaction to the S&P Case-Shiller home price index, released before Tuesday's start of trading.

The 20-city composite had home prices declining for a 28th consecutive month in November. The drop proved in line with expectations and also served to illustrate the fall in prices that precipitated the increase in home sales last month. .

"The declines continue unabated as the influx of foreclosed homes onto the market continues to put downward pressure on prices from coast to coast," said Dan Greenhaus, an analyst at Miller Tabak & Co.

"Further declines in prices mean further foreclosures and defaults, and so on and so on. This is the inevitable result of the gluttonous rise of home prices as houses became an asset class and should be a welcome turn of events, no matter how painful it is," said Greenhaus.

The S&P Case-Shiller report translates into an 18% decline in home prices for the 12 months ending in November, or a loss of approximately $3.8 trillion in the market value of U.S. housing stock.

Government statistics show household net worth fell more than 11% year-over-year through September, and "lower housing values combined with equity market declines will surely drive the December net-worth figures even lower," said Jack Ablin, chief investment officer, Harris Private Bank.

But Ablin too finds a positive note amid the downbeat numbers: "Our models show that median home prices on a national basis are at 'fair value' when gauged against the Consumer Price Index. Given the erosion of the credit markets, there is no doubt housing prices will overshoot to the downside, but we believe that most of the damage is behind us on housing."

Meanwhile, investors found little reason to jump back into the shares of homebuilders Tuesday. The S&P Homebuilders ETF (XHB) fell, as the likes of Ryland (RYL), Pulte Homes (PHM) and Lennar (LEN) slumped.

Not all equity analysts found much reason for cheer in either of the housing reports released this week. "It is good news that prices have come down, and as a result affordability has gone up, and more people can afford a home. The bad news is, nobody has the money," said Hugh Johnson, chairman of Johnson Illington Advisors.

And, while falling prices may have bolstered December sales, they can also harm the equities market and the economy at large. "When investors see the values of their houses go down, and the value of their stocks go down, it makes them more fearful, leading to less spending, a decline in economic activity, and clearly contributing to a lack of a desire to buy stocks."

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary. You can use this link on the day this article is published and the following day.