Home prices cap year with biggest rise since 2006 NEW YORK (Reuters) - Home prices closed out 2012 with the biggest annual gain in more than six years while sales of new homes spiked in January, the latest sign that the long-suffering housing market was on the mend, data showed on Tuesday. American consumers, meanwhile, grew more optimistic in February even as payroll taxes rose and about $85 billion worth of government spending cuts were due to take effect on March 1. The numbers are all pretty strong. It's a significant rise in confidence and a strong rise in new homes sales -- there is not really much to argue in those numbers," said David Sloan, an economist at 4Cast Ltd in New York. The S&P/Case Shiller composite index of 20 metropolitan areas showed home prices jumped 6.8 percent year-over-year in December, the biggest gain since July, 2006, just before the bottom began to fall out of the U.S. housing market. Separately, Commerce Department data showed sales of new homes jumped 15.6 percent to a 4-1/2-year high. The percentage increase was the largest in almost 20 years. Home prices have been rising since last February, helping housing contribute to growth last year for the first time since 2005. Historically low interest rates have also enticed buyers, and Federal Reserve Chairman Ben Bernanke's strong defense of central bank policy suggested those rates would not rise soon. "There's no doubt when you look at all the housing data that's come out, it certainly paints a picture of continued improvement in that market," said Anthony Chan, chief economist at Chase Private Client. You have the best of all possible worlds. You have low mortgage rates, which are going to stay for a while, and you have price appreciation. You take those two things into account and you have a formula for further significant improvement. Major U.S. stock indexes rallied while Treasury yields rose after the stronger-than-expected data. Data from the Federal Deposit Insurance Corp showing the U.S. banking industry recorded the highest earnings last year since before the financial crisis also contributed to a rosier economic outlook. Improvements in housing helped lift fourth-quarter profits at Home Depot. The world's largest home improvement chain also forecast higher sales and earnings per share for the current fiscal year. Some economists expect rising home prices and recent stock market gains to blunt the impact of tax increases for consumers, which should help spending improve in the second half of 2013. Macy's Inc, which also operates the Bloomingdale's chain of luxury stores, said Tuesday it expected same-store sales to rise about 3.5 percent this year. Consumers were certainly feeling more cheerful in February. The Conference Board said its consumer confidence index rose more than expected in February as Americans shrugged off worries about higher taxes. But while Washington averted the full brunt of tax increases and spending cuts that were scheduled to go into effect in 2013, taxes did rise for some Americans and the payroll deduction holiday came to an end, leaving consumers with less spending money. Government spending cuts worth about $85 billion are also due at the end of the week unless Washington agrees to postpone them, and some fear those could take a big bite out of growth and hurt spending. What's more, the housing market is far from fully healed. Some 20 percent of mortgages are underwater and foreclosure rates remain elevated. "Housing won't be a huge contributor to growth this year but we are on the long road to recovery," said Michael Hanson, senior U.S. economist at Bank of America Merrill Lynch. But consumers will need to see that these gains are persistent. However, Federal Reserve efforts to hold interest rates low, which involve buying mortgage-backed and other assets each month until the labor market improves, look set to continue. Fed Chairman Ben Bernanke on Tuesday strongly defended those efforts on Tuesday, saying the benefits outweigh the costs. Minutes from the Fed's last meeting showed some officials thought the central bank would have to slow purchases before seeing the hiring increase the program was designed to deliver. "Bernanke is arguing that continued stimulus is necessary despite nascent signs of improvement in the economy," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. Additional reporting by Lucia Mutikani in Washington and Leah Schnurr in New York; Editing by Chizu Nomiyama