Dec. 27 (Bloomberg) -- Sales of new homes in the U.S. rose more than forecast last month as lower mortgage rates and more incentives helped builders reduce inventory.

The 3.4 percent increase to an annual pace of 1.047 million in November followed a 1.013 million rate the prior month, the Commerce Department said today in Washington. Economists had forecast a 1.6 percent rise. The supply of unsold homes at the current sales pace fell to the lowest since May.

The figures add to evidence that the slowdown in construction may take less of toll on the economy early next year than it did last quarter. Even with the decline last month, the number of unsold homes remains near a record high, making it less likely homebuilding will strengthen outright, limiting economic growth, economists said.

``Builders continue to provide incentives, which is really helping the demand side, and affordability is stabilizing thanks to some relatively low mortgage rates,'' said Phil Neuhart, an economist at Wachovia Corp. in Charlotte, North Carolina. ``We're going to continue to see some weakness in sales well into next year but we may have seen some of the lows.''

Economists had expected sales to rise to a 1.018 million rate in November from a previously reported 1.004 million, according to the median of 50 estimates in a Bloomberg News survey. Estimates ranged from 960,000 to 1.115 million.

Builder shares rose after the report. The Standard & Poor's homebuilding index of 16 builders including Lennar Corp. and Pulte Homes Inc. increased 1.3 percent at 10:37 a.m. in New York.

Median Price

The median price of a new home rose 5.8 percent in November to $251,700 from $237,900 a year earlier, today's report showed. It was the biggest year-over-year increase since June.

The number of homes for sale fell to a seasonally adjusted 545,000 during the month from 558,000 the prior month. A record 573,000 homes were on the market in July. The supply of homes at the current sales rate dropped to 6.3 months' worth from 6.7 months' worth in October.

The number of homes completed and waiting to be sold rose 51 percent to a record 169,000 in November from the same month last year.

Sales of new homes were down 15 percent in November from the same month last year, the Commerce Department said in today's report.

Sales rose in three of four regions. They increased 22.5 percent in the Northeast to a 49,000 annual rate, 22.4 percent in the Midwest to a 175,000 pace, and 19 percent in the West to a 294,000. The rise in the Midwest was the biggest since December 2004. Sales fell 9.3 percent in the South to 529,000.

Home Resales

A report tomorrow from the National Association of Realtors may show that sales of existing homes in November fell to a 6.19 million pace from 6.24 million the prior month, according to a Bloomberg survey.

New-home sales are a more timely barometer of the housing market because they are recorded when a contract is signed. Most sales of existing homes, which comprise about 85 percent of the residential real estate market, are recorded when a contract closes and reflect buying decisions made months earlier.

The Realtors' group on Dec. 11 forecast 1.06 million new home sales for 2006, the fourth-best year on record. The figure would mark an almost 18 percent decline from last year's all- time high. The Realtors expect new-home sales in 2007 to decline 9.4 percent to 957,000.

The housing market suffered its worst contraction in 15 years last quarter after average price increases of 60 percent over the previous five years put home ownership out of the reach of many Americans.

Effect on Growth

Home construction in the third quarter fell at an annual rate of almost 19 percent, the government's latest report on gross domestic product showed. The decreased helped slow the economy to a 2 percent pace, from 5.6 percent in the first quarter.

The Federal Reserve has been seeking to cool the economy enough to keep a lid on inflation. After raising its key lending rate 17 consecutive times through June, the Fed has held the rate unchanged during the last four policy meetings. The median forecast in a Bloomberg survey of 76 economists taken early this month forecasts the Fed may begin cutting rates in the second quarter.

Slower-than-expected growth in recent months has pushed Treasury yields lower, holding the rate on 30-year fixed mortgages to under 6.2 percent for the last month, compared with a high for the year of 6.8 percent reached in July. The Mortgage Bankers' Association's index of purchase applications are up almost 4 percent from a three-year low reached at the end of October.

Costing Jobs

The housing slowdown is costing jobs. Builders shed 53,000 workers in the last two months, according to government reports. Manufacturers shed 59,000 workers in the same period, while goods producing companies, some at companies that produce housing-related supplies or products, cut 102,000 workers.

``Even if sales stabilize at this level, the contraction in construction activity is still in front of us,'' said Kevin Logan, chief markets economist at Dresdner Kleinwort in New York. ``That's what's going to affect the economy in the year ahead.''

Building permits in November fell to a 1.506 million-unit pace, the lowest in nine years, the Commerce Department reported Dec. 19.

The number of new homes available is close to a record. They have averaged 555,000 this year through October, compared with 351,000 during the past 10 years, according to government figures.

Existing Home Inventories

Existing-home sales inventories are also near a record, averaging 3.515 million this year. Cancellations of purchase contracts, which aren't counted in the government's numbers, have mounted.

``That's growing,'' said Logan. ``There is even more inventory than actual inventory numbers suggest.''

Hovnanian Enterprises, New Jersey's largest builder, on Dec. 18 reported a fourth-quarter loss on cancellations of new- home orders. Hovnanian customers canceled 36 percent of their contracts in the period, an increase of 25 percent, the company said.

``We didn't have this in other slowdowns, customers walking away,'' Chief Executive Officer Ara Hovnanian said in an interview on Dec. 19.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: December 27, 2006 10:51 EST