By Bob Willis Oct. 27 (Bloomberg) -- Sales of new houses in the U.S. unexpectedly rose in September from a 17-year low, propelled by a drop in prices ahead of the latest turmoil in financial markets. Purchases increased 2.7 percent to an annual rate of 464,000 from 452,000 the prior month that was less than previously estimated, the Commerce Department said today in Washington. The median sales price decreased to a four-year low. The drumbeat of builder bankruptcies since the middle of last year and frozen credit markets signal a collapse in mortgage lending that may extend the housing recession into a fourth year. Federal Reserve policy makers, meeting this week, are projected to cut interest rates again in a bid to alleviate the damage from the collapse in financial markets. ``Builders are seeing the light,'' Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, said in a Bloomberg Television interview. ``They are cutting prices more aggressively. They're very nervous about all the foreclosures.'' Economists had forecast new home sales would drop to a 450,000 annual pace from an originally reported 460,000 rate the prior month, according to the median estimate in a Bloomberg survey of 59 economists. Forecasts ranged from 400,000 to 501,000. The median price of a new home decreased 9.1 percent from a year earlier to $218,400, the lowest since September 2004. Sales were down 33 percent from September 2007, the Commerce report showed. On a positive note, builders cut inventories at a record pace. The number of homes for sale fell to a seasonally adjusted 394,000, the fewest since June 2004. The 7.3 percent decline from August was the biggest since record keeping began in 1963. Supply Falls The supply of homes at the current sales rate fell to 10.4 months' worth from 11.4 months. A five to six months' supply is often cited as signaling a stable market. The increase in purchases was paced by a 23 percent surge in the West. Sales dropped 21 percent in the Northeast and 5.8 percent in the Midwest. Home resales rose a more-than-forecast 5.5 percent in September to a 5.18 million pace, the highest level in a year, the National Association of Realtors said on Oct. 24. The gain was driven by sales of distressed properties, which comprised up to 40 percent of the total, the Realtors group said. The median price fell 9 percent. Sales of previously owned homes are compiled from closings and reflect contracts signed weeks or months earlier. New-home purchases, while accounting for only about 10 percent of total sales, are considered a timelier indicator because they are based on contract signings. Government Efforts The biggest housing recession in a generation was showing signs of nearing a bottom in sales when financial markets began to implode in September, leading to the government takeover of mortgage finance companies Freddie Mac and Fannie Mae. A $700 billion rescue plan and coordinated rate cuts by central banks around the world followed. Stricter lending regulations and tumbling home prices make it harder for Americans to tap home equity for extra cash. Consumer spending in the third quarter probably fell for the first time since 1991, and may have tipped the economy into a recession, according to economists surveyed earlier this month. Home prices have fallen by about a fifth from their highs in mid-2006, according to the S&P/Case-Shiller home prices index of 20 major cities. Falling prices mean more Americans can't refinance their mortgages, prompting foreclosures to surge to record levels in the third quarter. That, in turn, may cause prices to fall further. `Vicious' Circle ``This vicious feedback loop is still in play,'' David Seiders, chief economist of the National Association of Homebuilders, said in an interview on Oct. 17. That, he said, is ``putting a nail'' in the coffin of the new-home market. New-home sales have declined 67 percent from their peaks in July 2005. Work began last month on the fewest single-family homes in 26 years, the Commerce Department reported on Oct. 17. The number of building permits issued also fell, a sign that declines in construction will continue to hurt the economy. Confidence among U.S. homebuilders slid in October to the lowest level since record-keeping began in 1985, figures from the National Association of Home Builders/Wells Fargo showed earlier this month. At least a dozen homebuilders have sought bankruptcy protection since June 2007, including billionaire Carl Icahn's WCI Communities Inc. Pulte Homes Inc., the third-largest U.S. builder, last week reported a net loss of $280.4 million for the third quarter, more than double what analysts had projected. ``The homebuilding operating environment significantly worsened during the third quarter of 2008,'' Richard Dugas, the chief executive officer of Bloomfield Hills, Michigan-based Pulte said in a statement. ``The industry continues to be plagued by tighter mortgage availability, a growing number of foreclosures, and a historically high supply of unsold homes.'' To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

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