March 26 (Bloomberg) -- New-home sales in the U.S. unexpectedly fell in February to the lowest level in almost seven years, dimming prospects for a quick revival in housing.

The supply of unsold homes climbed to the highest in 16 years, the Commerce Department said today in Washington. Purchases dropped 3.9 percent to an annual pace of 848,000 last month. Economists had forecast they would rise to a 985,000 rate, based on the median forecast in a Bloomberg News survey.

The figures, made worse by the coldest February in more than a decade, doused optimism from reports last week on sales of previously-owned dwellings and housing starts. Some analysts read those numbers as evidence that the industry may be stabilizing, as the Federal Reserve has anticipated. Shares of homebuilders tumbled and bonds gained as traders speculated that the economy will slow further.

``We're probably not going to see the pickup in housing by the end of the year that we were looking for,'' said Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York. ``Housing imbalances will take longer to correct because inventories aren't declining very fast.''

The report points to more declines in home construction that will further weigh on the economy as a wave of mortgage foreclosures adds to the woes of builders including KB Home. The February pace of new-home sales was the slowest since June 2000.

``As ugly as these numbers are, they don't reflect the tightening of lending standards, which means sales are going to get worse,'' said Christopher Low, chief economist at FTN Financial in New York. ``The longer it takes for housing to recover, the more the risk it could spill over to other parts of the economy.''

Contrasting Figures

The figures contrasted with reports last week showing a gain in housing starts and an unexpected jump in home resales. Existing homes make up 85 percent of the market.

The yield on the benchmark 10-year Treasury note fell to 4.60 percent as of 5 p.m. in New York, from 4.61 percent late in the day on March 23. The Standard & Poor's homebuilding index, comprising 16 companies that include D.R. Horton Inc. and Lennar Corp., dropped 1.8 percent.

The median price of a new home fell 0.3 percent in February to $250,000 from $250,800 a year earlier, today's report showed.

The number of homes for sale at the end of the month rose to 546,000 from 538,000 in January. That left the supply of homes at the current sales rate at 8.1 months' worth, compared with 7.3 months in January. The number of homes completed and awaiting a buyer rose to 179,000 last month.

Incentives

While builders are offering more incentives to unload homes already built, the actual number of homes in inventory may be more than the government reports because it doesn't include cancellations, economists said.

New-home sales for February fell 18.3 percent from a year earlier, the government said.

Purchases fell 26.8 percent in the Northeast to an annual rate of 41,000. They fell 7.0 percent in the South to 450,000. Sales declined 20 percent in the Midwest to 124,000. Sales rose 24.6 percent in the West to an annual rate of 233,000.

Snowstorms in the Midwest and Northeast may have restrained home sales and construction, economists said. Last month was the coldest February since 1994, according to the National Climatic Data Center in Asheville, North Carolina.

Timely Gauge

New-home sales are considered a more timely gauge of the housing market because they are recorded when a contract is signed. Most sales of existing homes are counted when a contract closes, usually a month or two later.

Builders such as Lennar, KB Home and D.R. Horton are offering free granite countertops, help on mortgage payments and other incentives to clear out inventory.

``Until we get through the selling season and see what happens with the inventory levels on resale, we're not ready to say that the markets have bottomed and that prices have stabilized,'' Jeffrey Mezger, chief executive of Los Angeles- based KB Home, the fifth-largest U.S. homebuilder, said on a March 22 conference call. ``We think there will continue to be pressure on pricing for the next few quarters.''

Declining interest rates are attracting some buyers. The average rate on a 30-year fixed mortgage was 6.16 percent last week, down from 6.8 percent late last July.

Toll Brothers Inc. Chief Executive Officer Robert Toll said the number of customers canceling orders may be starting to abate. Still, Toll said he couldn't predict when the housing recovery would begin.

Tightening Standards

The Standard & Poor's Supercomposite Homebuilding Index has fallen 16 percent since the start of the year. Lenders are raising their credit standards as delinquencies mount, reducing the number of consumers able to obtain a mortgage.

``Recent problems in the subprime mortgage market combined with tightening credit requirements could exacerbate the already difficult conditions in the homebuilding industry,'' Mezger said in a statement last week.

Subprime mortgage borrowers, typically people with limited or poor credit histories, last quarter fell behind on their mortgage payments at the highest rate in four years.

The turmoil is one reason Fed policy makers meeting last week softened their inclination to raise interest rates, economists said. The Fed left the benchmark lending rate at 5.25 percent.

Roger Cole, the Fed's director of Banking Supervision and Regulation, said March 22 that while the Fed is ``concerned'' about distress in subprime borrowing, there has so far been no spillover to the broader mortgage market.

Fed Chairman Ben S. Bernanke said the drag from housing should diminish later this year, giving a lift to the economy in the second half.

To contact the reporter on this story: Joe Richter in Washington at Jrichter1@bloomberg.net

Last Updated: March 26, 2007 17:21 EDT