U.S. job market firming; tight inventories constraining housing

(Adds housing data, analyst comments, updates markets)

* Weekly jobless claims decline 8,000

* Four-week average of claims falls 2,250

* Existing home sales drop 0.9 percent in August

By Lucia Mutikani

WASHINGTON, Sept 22 (Reuters) - The number of Americans filing for unemployment benefits unexpectedly fell last week to a two-month low, pointing to labor market strength that could pave the way for the Federal Reserve to raise interest rates by December.

The upbeat initial jobless claims data came a day after the U.S. central bank left interest rates unchanged but strongly signaled it could raise borrowing costs by the end of the year, citing a recent pickup in economic growth and continued progress in the labor market.

While other data on Thursday showed home resales fell in August for a second straight month, realtors and economists blamed the slump on a chronic shortage of houses available on the market, which is limiting choice for buyers.

The housing market remains on solid ground, with home prices rising at a moderate pace.

"The economy is stronger than we thought with another turn tighter of the screw for the labor market. If Fed officials are waiting for the economy to improve further before raising rates, they are just too late," said Chris Rupkey, chief economist at MUFG Union Bank in New York.

Initial claims for state unemployment benefits declined 8,000 to a seasonally adjusted 252,000 for the week ended Sept. 17, the Labor Department said, the lowest level since mid-July.

It was the 81st consecutive week that claims remained below the 300,000 threshold, which is associated with robust labor market conditions. That is the longest stretch since 1970, when the labor market was much smaller.

Economists had forecast first-time applications for jobless benefits rising to 262,000 in the latest week.

The Fed on Wednesday offered a solid assessment of the labor market, with Fed Chair Janet Yellen saying policymakers continued to expect that labor market conditions "will strengthen somewhat further over time."

The U.S. central bank raised its benchmark overnight interest rate last December for the first time in nearly a decade. It has held the rate steady so far this year amid concerns over persistently low inflation.

U.S. stocks and government bonds were trading higher on Thursday amid perceptions that the Fed would increase rates slowly because of benign inflation.

The dollar fell against a basket of currencies.

LABOR MARKET STRENGTH

The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell 2,250 to 258,500 last week.

Last week's claims data covered the survey period for September's nonfarm payrolls. The four-week average of claims fell 6,750 between the August and September survey periods, suggesting a pickup in job growth this month. Payrolls increased by 151,000 jobs in August.

While the pace of job growth has slowed from a monthly average of 186,000 in the first seven months of the year, it is well above the roughly 100,000 that Yellen says is needed to absorb new entrants in the job market.

With (Other OTC: WWTH - news) labor market strength starting to boost wages and mortgage rates still near historic lows, the fundamentals for the housing market remain bullish, even though sales have softened in recent months.

In a second report on Thursday, the National Association of Realtors said existing home sales slipped 0.9 percent to a seasonally adjusted annual rate of 5.33 million units in August. The NAR said a dearth of properties for sale, which was keeping prices elevated, was largely to blame for the slump in activity.

The stock of homes for sale dropped 3.3 percent to 2.04 million last month, leaving inventory down 10.1 percent from a year ago. At August's sales pace, it would take 4.6 months to clear the supply of houses on the market, down from 4.7 months in July. A six-month supply is viewed as a healthy balance.

"Inventory levels below 2 million suggest scarcity and a lack of available properties on the market may be a limiting factor on the pace of sales," said Michael Gapen, chief economist at Barclays (LSE: BARC.L - news) in New York.

"Ongoing gains in employment and low interest rates should continue to underpin housing demand in the coming quarters."

The median house price rose 5.1 percent to $240,200 in August from a year ago. Relatively high house prices are keeping first-time buyers from the market. The share of first-time buyers dipped to 31 percent last month from 32 percent in July.

Underscoring the inventory tightness, houses typically stayed on the market for 36 days in August, down from 47 days a year ago. Supply is also being squeezed as the flow of foreclosed properties dries up.

(Reporting by Lucia Mutikani; Additional reporting by Lindsay Dunsmuir; Editing by Paul Simao)