Sept. 27 (Bloomberg) -- New home sales in the U.S. unexpectedly rose in August from a three-year low the month before, signaling a possible pause in the housing slowdown. The median price of new homes fell for the first time since 2003.

Purchases of new homes, which account for about 15 percent of the market, rose 4.1 percent to an annual pace of 1.05 million from a 1.009 million pace in July that was less than previously reported, the Commerce Department said in Washington. Inventories slipped 0.4 percent.

Declining mortgage rates and incentives offered by builders helped spur purchases last month, economists say. The Federal Reserve, after raising its key lending rate 17 times in the two years through June, is seeking to engineer a soft landing for the housing market and the broader economy.

``New home sales were surprisingly stable last month given that homebuilders say the outlook continues to worsen,'' Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd in New York, said. ``This is likely to be just a one- month respite as inventories remain at high levels and affordability remains a key issue.''

Economists' surveyed by Bloomberg News forecast sales would decline to 1.04 million from an originally reported 1.072 million pace. Forecasts ranged between 990,000 to 1.1 million.

Durable Goods Orders

Orders placed with U.S. factories for durable goods unexpectedly dropped in August after falling in July, a Commerce Department report earlier today showed. The 0.5 percent decrease in orders followed a 2.7 percent drop in July, making the first back-to-back decrease since April-May 2004.

Mortgage applications in the U.S. dropped last week by the most since June, the Mortgage Bankers Association reported today. The group's gauge of purchases fell 5.5 percent, the most since the week ended July 14. Refinancing also dropped.

Sales of new homes are down 17.4 percent from the same time last year. The median price of $237,000 in August compares with $240,100 in the same month last year. Price gains have slowed since September, when they were up almost 14 percent on a year- over-year basis.

The rise in new-home purchases follows a report Sept. 25 that showed sales of previously owned houses fell last month to the lowest annual pace since January 2004. The National Association of Realtors also said the median price of previously owned homes fell 1.7 percent, the first year-on-year decline since 1995.

Some economists consider new home sales a better leading indicator of the state of the market than resales. New home sales are recorded when a contract is signed, while purchases of existing homes are calculated when the sale is closed, usually a month or two later.

Homes for Sale

There were 568,000 new homes for sale at the end of the month, down from 570,000 in July. The number of unsold homes fell to a 6.6-month supply at the August sales pace, the first drop since March, from a 7-month supply in July.

The number of homes that are completed and waiting to be sold rose by 7,000 to 148,000 in August, today's report showed.

Purchases rose in all regions except the West. They rose 21.7 percent in the Northeast to 84,000, 12.2 percent in the Midwest to 156,000 and 11.1 percent in the South to 582,000. Purchases fell 17.7 percent in the West to 228,000.

The slowdown in housing is crimping consumer spending, which accounts for two-thirds of the economy. Economic growth may average an annual rate of 2.7 percent in the second half this year, down from a 4.25 percent pace in the first six months, according to a Bloomberg survey.

``People felt wealthier and they took advantage of increasing equity to draw down their home-equity lines of credit. They converted the wealth they gained into consumption,'' said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. ``That's gone away. The amount of equity people hold in their houses is falling.''

Home Equity Borrowing

Net home equity extraction fell to an annualized $141 billion in the second quarter from a $196 billion pace a year earlier, according to Federal Reserve research undertaken by former Fed Chairman Alan Greenspan and senior economist James Kennedy.

Residential construction is also falling as sales slow and inventories accumulate. Home construction detracted 0.6 percentage point from growth in the second quarter, at a time when the economy slowed to a 2.9 percent pace of growth from 5.6 percent in the first three months of the year.

The Realtors forecast a 16.1 percent drop in new-home sales this year to 1.08 million and a 7.6 percent decline in sales of existing homes to 6.54 million.

Average home prices as measured by the Office of Federal Housing Enterprise Oversight rose 56 percent in the five years through the second quarter of 2006, OFHEO chief economist Patrick Lawler told Congress on Sept. 13. That's put housing affordability at its lowest since 1989.

Mortgage Rates

Rates on 30-year mortgages averaged 6.4 percent in the week ended Sept. 22 compared with 6.8 percent the week of July 21, according to Freddie Mac, the second-largest mortgage purchaser. Rates averaged 5.8 percent a year earlier.

More people who bought with adjustable-rate mortgages in recent years are having trouble meeting payments as those ARMS adjust to higher rates. Foreclosures begun on prime ARMs rose to a four-year high in the second quarter, according to a report released Sept. 13 by the Mortgage Bankers Association in Washington.

Homebuilders are also suffering. Miami-based Lennar Corp., the third-biggest U.S. homebuilder by market value, said Sept. 26 that profit fell 39 percent and orders declined 5 percent in its fiscal third quarter after a drop in demand forced it to offer incentives to lure buyers.

``It is not clear that the homebuilding downturn has yet found a floor,'' Lennar Chief Executive Officer Stuart Miller said in a statement.

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

Last Updated: September 27, 2006 10:00 EDT