Feb 27 (Bloomberg) -- Purchases of new homes in the U.S. fell more than forecast in January as lending restrictions and plummeting prices kept buyers away.

Sales dropped 2.8 percent to an annual pace of 588,000, the fewest since February 1995, from a 605,000 rate the prior month, the Commerce Department said today in Washington. The median price slumped a record 15.1 percent from a year earlier.

Home values will keep falling as foreclosures add to the glut of unsold properties, indicating the deepening real-estate recession will hurt growth for a third year. The report comes as Federal Reserve Chairman Ben S. Bernanke begins testimony before Congress, where he may signal that central bankers are prepared to lower interest rates again as threats to the economy mount.

``New-home sales will keep falling deeper and deeper into the red,'' Lindsey Piegza, an analyst at FTN Financial in New York, said before the report. ``There's a lot of inventory that builders have to clear out. Home prices will keep declining.''

Economists forecast new home sales would drop to a 600,000 annual pace from an originally reported 604,000 rate the prior month, according to the median estimate in a Bloomberg survey of 70 economists. Forecasts ranged from 560,000 to 650,000.

Orders for U.S. durable goods fell a more-than-forecast 5.3 percent in January as a slowing economy prompted companies to reduce spending, a separate report from Commerce showed. Excluding transportation gear, demand dropped 1.6 percent, the third decline in four months.

Less Investment

Companies have put investment plans on hold as consumers rein in spending in the face of the biggest housing slump in a quarter century and near-record fuel costs.

The housing report showed the median price of a new home decreased to $216,000 from $254,400 a year earlier.

A decline in inventory failed to keep pace with the drop in demand. The number of homes for sale fell to a seasonally adjusted 482,000, and the supply of homes at the current sales rate jumped to 9.9 months' worth, the most since 1981.

Sales of new homes were down 34 percent from January 2007.

Purchases fell in three of four regions, led by a 10 percent decline in the Northeast. The West registered a 2.2 percent gain.

Reports this week reinforced concerns that the fallout from the worst housing recession in a quarter century will undermine the economy. Home prices had their biggest fourth-quarter decline since 1991, according to figures from the Office of Federal Housing Enterprise Oversight.

Other Reports

Sales of previously owned homes, which account for about 85 percent of the market, fell in January to the lowest level since records began nine years ago, the National Association of Realtors also reported.

New-home purchases, which account for the rest of the market, are considered a timelier indicator because they are based on contract signings. Existing home sales are calculated when a contract closes, usually a month or two later.

Fed policy makers, who slashed the benchmark interest rate by 1.25 point to 3 percent last month, noted ``activity in housing markets had continued to deteriorate sharply,'' according to minutes of the Jan. 30 meeting issued last week. The cuts, including an emergency move on Jan. 22, amounted to the fastest reduction since the federal funds rate became the main policy tool around 1990.

Analysts and investors await Bernanke's semi-annual testimony before Congress today and tomorrow for clues on the latest Fed views.

`Broader Effect'

His predecessor, Alan Greenspan, said at a conference in Abu Dhabi, United Arab Emirates, this week that home prices will ``continue to fall'' and the housing slump is having a ``broader effect'' on consumer spending. Greenspan said a recession is possible this year and may be deeper than the past two.

Home repossessions by banks rose 90 percent to 45,327 last month from the same period a year ago, Irvine, California-based RealtyTrac Inc. said yesterday. Total foreclosure filings, including default and auction notices and repossessions, increased 57 percent to the highest level since August.

Firms in the housing industry are at the center of the economic slowdown. Fannie Mae, the largest source of money for U.S. home loans, said today it posted a $3.55 billion fourth-quarter loss and projected the slump will continue through this year as rising foreclosures send credit costs soaring.

``We are working through the toughest housing and mortgage markets in a generation,'' Fannie Mae Chief Executive Officer Daniel Mudd said in an accompanying statement to a Securities and Exchange Commission filing.

Title insurers Glen Allen, Virginia-based LandAmerica Financial Group Inc., and Stewart Information Services Corp., based in Houston, last week reported fourth-quarter losses on lower revenue.

``We see the home-improvement market in 2008 as challenging,'' Home Depot Inc. Chief Executive Officer Frank Blake said in a statement yesterday. The world's largest home- improvement retailer reported a drop in fourth-quarter profit and forecast sales will decline this year.

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

Last Updated: February 27, 2008 10:00 EST