Sales of new homes sank to a record low in February and prices were the weakest in just over seven years, underscoring the housing market's lingering malaise, which could slow the economic recovery.

The Commerce Department said on Wednesday sales of new single-family homes dropped 16.9 percent to a seasonally adjusted 250,000 unit annual rate, the lowest since records began in 1963, after a 301,000-unit pace in January.

Despite the surprise plunge in sales, economists did not believe a new downturn in the housing market was under way, with some suggesting bad weather might have been a factor.

We do not believe the housing sector is on the verge of renewed contraction. Rather, we continue to expect the recovery in housing to be disappointingly and frustratingly slow, said Michelle Girard, an economist at RBS in Stamford, Connecticut.

An oversupply of homes exacerbated by an increasing flood of properties falling into foreclosure is frustrating recovery in the housing market. The housing market has remained on the periphery of the broader economy's expansion.

However, residential construction has declined to about 2.3 percent of gross domestic product from a peak of about 6 percent in 2005.

Analysts do not see the housing weakness derailing the economic recovery but instead slowing growth as plummeting home values erode consumer confidence and hurt spending at a time when there are signs the economy is picking up.

On Wednesday, the head of union members at General Motors Co said the automaker was calling back about 2,000 workers and would be at full employment this fall.

New home sales last month plunged to all-time lows in three of the four regions and surprised economists who had expected them to edged up to a 290,000 unit rate.

The weak data weighed on homebuilder shares such Toll Brothers and D.R. Horton, but overall, stocks recouped losses to end higher. Prices of U.S. government debt were little changed, while the dollar gained against a basket of currencies.

A report on Monday showed a steep drop in sales of previously owned homes in February, with prices tumbling to a near nine-year low. New home sales dropped 28 percent compared to February last year.


Analysts are optimistic home sales will pick-up from their current depressed levels in the spring, but caution persistent declines in house prices could hold back recovery.

The median sales price for a new home plunged 13.9 percent last month to $202,100, the lowest since December 2003. Compared with February last year, the median price fell 8.9 percent.

The decline in the home prices is a function of the imbalance in the housing market, where there is a particular concentration of distressed properties in the market, said Michelle Meyer, an economist at Bank of America Merrill Lynch in New York.

The fact that home prices are falling more will keep people on the sidelines.

Foreclosed properties typically sell well below market value, giving builders stiff competition and forcing them to hold back on new construction. Housing starts recorded their biggest decline in 27 years in February.

February's weak sales pace pushed the supply of new homes on the market up to 8.9 months' worth -- the highest since August -- from 7.4 months' worth in January.

There were 186,000 new homes available for sale last month, the smallest supply of homes since 1967.

Despite lean inventories, new home sales will likely continue to bounce along the bottom for a while until the glut of previously owned homes is whittled down. New home sales account for less than 10 percent of overall sales.

According to the National Association of Realtors, new home prices have been running 45 percent higher than existing home prices, a premium that is historically about 15 percent, indicating previously owned homes are selling well below the cost of construction.

The existence of this unusually large price gap, along with rising materials prices, is making it difficult for builders to compete, said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Unfortunately, the price gap will likely remain in place until the huge amount of foreclosures is cleared.

Separately, the Mortgage Bankers Association said applications for home loans rebounded 2.7 percent last week.

(Editing by Andrea Ricci and Kenneth Barry)