April 24 (Bloomberg) -- Purchases of new homes in the U.S. plunged more than forecast in March to the lowest level in almost 17 years as stricter loan rules and falling prices caused buyers to hold off.

Sales dropped 8.5 percent to an annual pace of 526,000, the fewest since October 1991, from a 575,000 rate the prior month, the Commerce Department said today in Washington. The median sales price slumped 13.3 percent from the same time last year, the most in almost four decades.

A jump in subprime mortgage defaults and record foreclosures have worsened the real-estate slump and led banks to limit lending. The threat of a prolonged recession is growing as lower home values constrain consumer spending and persistent declines in homebuilding subtract from economic growth.

``This blows away any hope that things are stabilizing in housing,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. ``It's a negative for growth and for the economy, and it's going to persist into the second half of the year.''

Treasuries remained lower after the report, pushing yields higher. The benchmark 10-year note yielded 3.81 percent as of 10:15 a.m. in New York, up 8 basis points from yesterday. Stocks were lower.

Economists had forecast new home sales would drop to a 580,000 annual pace from an originally reported 590,000 rate the prior month, according to the median estimate in a Bloomberg survey of 75 economists. Forecasts ranged from 560,000 to 602,000.

Durable Goods Orders

Separate figures from Commerce today said orders for durable goods, excluding transportation, rose a greater-than- forecast 1.5 percent in March. Total orders fell 0.3 percent.

The housing report showed the median price of a new home decreased to $227,600 from $262,600 a year earlier. The year- over-year decline was the biggest since July 1970.

While inventories decreased, builders were not able to keep pace with the drop in demand. The number of homes for sale fell to a seasonally adjusted 468,000, the fewest since July 2005. Still, the supply of homes at the current sales rate jumped to 11 months, the most since September 1981.

Sales were down 37 percent from March 2007.

Purchases dropped in all four regions, led by a 19 percent decline in the Northeast.

Reports this week signaled the housing recession is far from over as prices and demand continue to slide. Home values dropped 2.4 percent in February from a year earlier, the Washington-based Office of Federal Housing Enterprise Oversight said.

Home Resales

Sales of previously owned homes, which account for about 85 percent of the market, fell 2 percent in March, according to the National Association of Realtors. It was the seventh decline in eight months.

New-home purchases, which make up the remaining 15 percent of the market, are considered a timelier indicator because they are based on contract signings. Resales are calculated when a transaction closes, usually a month or two later.

Declines in residential construction have subtracted from economic growth since the first three months of 2006, culminating in a 25 percent drop last year that was the biggest since 1980.

`Anemic' Growth

Economic growth slowed in nine of 12 Fed districts since February and homebuilding is ``generally anemic,'' according to the Federal Reserve's regional business survey, known as the Beige Book. Fed Chairman Ben S. Bernanke this month conceded a recession is possible as housing, employment and consumer spending deteriorate.

Policy makers, who have lowered the benchmark overnight lending rate between banks by 2 percentage points so far this year, may cut rates again next week to prevent a deeper economic downturn.

Pulte Homes Inc., the fourth-largest U.S. homebuilder, today reported a loss that was almost three times higher than analysts' projections.

``Across the country, the overall sales environment continues to be difficult,'' Richard Dugas, Pulte's chief executive officer, said today on a conference call. ``Builders are intensely competing for a diminishing pool of buyers.''

Housing-related businesses are also struggling. Sherwin- Williams Co., the largest U.S. paint retailer, reported a 30 percent decline in first-quarter profit as the housing slump hurt demand and raw-material costs rose.

``We are not counting on a near-term recovery in the housing markets,'' Chief Executive Officer Christopher Connor said on a conference call with investors on April 22. ``We expect the new-housing market to continue to spiral downward this year.''

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

Last Updated: April 24, 2008 10:15 EDT