New single-family home sales rose for a second straight month in April and supply was the lowest in a year, but an overhang of previously owned homes on the market will stifle any housing market recovery.

The Commerce Department said sales increased 7.3 percent to a seasonally adjusted 323,000 unit annual rate, the highest level since December, while prices also rose. Economists had expected a 300,000-unit pace.

All four regions recorded gains in sales, with the West reporting a 15.1 percent rise. However, compared to April last year sales were down 23.1 percent.

Although the headline figure has moved sharply on a month-to-month basis, reflecting in part the impact of harsh weather in earlier months, the bottom line is that the new home market continues to bounce along the bottom, said Omair Sharif, an economist at RBS in Stamford, Connecticut.

An oversupply of used houses and a relentless wave of foreclosed properties are curbing the market for new homes, even as builders are keeping lean inventories.

There were a record low 175,000 new homes available for sale last month, down 2.8 percent from the prior month.

Data last week showed a steep drop in new home construction in April and a dip in sales of previously owned homes.

There's still a tremendous overhang in the housing market, and while new home sales are starting to percolate, that doesn't change the fact that we still have such huge inventory, said Michael Yoshikami, chief investment strategist at Ycmnet Advisors in Walnut Creek, California.

Stocks on Wall Street were little changed, while prices for U.S. government bonds fell ahead of new debt sales later in the week. The dollar fell against a basket of currencies.


While the report cast a positive light on the housing market, it did little to change perceptions the economy remained mired in a soft patch.

That view was reinforced by a Richmond Federal Reserve survey showing manufacturing activity in the central Atlantic region stalled in May, after expanding during the previous seven months.

The Richmond Fed's manufacturing index came in at -6, a sharp contraction from the reading of +10 in April, dragged down by declining shipments and new orders.

It added to a raft of other data ranging from retail sales to industrial production that have painted a picture of an economy struggling to regain momentum as the second quarter started, with employment only the bright spot.

The government is expected to report on Thursday that the economy grew at a still tepid 2.1 percent annual rate in the first quarter, according to a Reuters survey, rather than the 1.8 percent pace it estimated last month.

The upward revision will most likely reflect a slightly faster pace of inventory accumulation than initially thought.

The Commerce Department report also showed the median sales price for a new home rose 1.6 percent last month to $217,900. Compared with April last year, the median price increased 4.6 percent.

At April's sales pace, the supply of new homes on the market dropped to 6.5 months' worth, the lowest since April last year, from 7.2 months' worth in March.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)