Sales of new U.S. homes dropped by an unexpected 3.6 per cent last month, government data shows.

A sign indicates a cut price for a home in East Palo Alto, Calif., last year. After troughing in January, U.S. home sales have revived in recent months. (Paul Sakuma/Associated Press)

The U.S. Commerce Department said Wednesday that sales fell to a seasonally adjusted annual rate of 402,000 from a downwardly revised 417,000 in August. August's sales had been initially tallied at 429,000.

Economists surveyed by Thomson Reuters had expected a pace of 440,000 sales for September.

It was the first decline since March. The September sales total was off 7.8 per cent from a year ago, although it was up 22 per cent from the market's January bottom.

It is still down more than 70 per cent from the peak of July 2005.

The median sales price of $204,800 US was off 9.1 per cent from $225,200 a year earlier. However, the median price — half of homes sold for more, half for less — was up 2.5 per cent from August's $199,900.

The decline in the number of sales was driven by drops of nearly 11 per cent in the West and 10 per cent in the South. Sales rose 35 per cent in the Midwest and were unchanged in the Northeast, the Commerce Department said.

"Even though today’s report on new home sales disappointed expectations of continued improvement, the level of sales remains well above the trough of 329,000 set in January of this year," RBC economist Josh Heller said.

The year-over-year decline does not alter the bank's view that residential real estate will make a positive contribution to third-quarter economic growth, he said.

Tax credit expiring

The report reflects contracts to buy homes, not completed sales. Would-be buyers have had a harder time obtaining mortgages and getting properties appraised since last year's credit crunch, which has made transaction closings take longer.

If deals are not completed before a Nov. 30 deadline, buyers are unable to take advantage of a tax credit of up to $8,000 for first-time buyers. That's playing a role in the figures, economists suggest.

'The pullback could be quite significant'—Brad Hunter, Metrostudy economist

The report "demonstrates the power of the first-time homebuyers tax credit," said Bernard Markstein, senior economist with the National Association of Home Builders, which has been lobbying Congress to extend and expand the tax incentive. "We just haven't gotten the economy back to the point where we can step back and say the housing market doesn't need any more support."

Congress is considering extending the tax credit through March 31 and gradually phasing it out over the rest of next year. "If they don't extend it, then I think the pullback could be quite significant," said Brad Hunter, chief economist with Metrostudy, a real estate research firm.

Critics, however, say many buyers would have entered the market anyway and call the credit a subsidy for people who don't need it.

Low mortgage rates, the tax credit and more affordably priced homes have provided a lift to the housing market this year. Sales of previously occupied homes jumped more than nine per cent in September. That report measures completed sales rather than sales agreements.

The government counted 251,000 new homes for sale at the end of September, down almost four per cent from August and the lowest inventory in nearly 27 years. At the current sales pace, that represents 7.5 months of supply, flat for the second straight month.

With files from The Associated Press