Sales of newly built single-family homes rose for a second straight month in April and supply was the lowest in a year, but an overhang of previously owned houses on the market could hobble recovery.

The Commerce Department said on Tuesday sales increased 7.3 percent to a seasonally adjusted 323,000 unit annual rate, the highest since December, also giving prices a lift.

While the report showed some improvement across the board, new home sales are just bouncing along the bottom, and did not change views the economy remains mired in a soft patch.

The problem for the housing sector still remains the huge inventory of unsold homes, said Millan Mulraine, a senior macro strategist at TD Securities in New York. Even if we have a surge in demand, there is still a backlog of unsold homes to be absorbed before we can see an upward momentum in prices.

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.

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


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

According to the National Association of Realtors, there were 3.87 million previously owned homes on the market last month. But economists estimate the figure could be anywhere between 7 and 8 million if foreclosed properties and those at risk of being repossessed by banks are taken into account.

With distressed properties -- which typically sell at about 20 percent below their value -- accounting for more than a third of transactions every month, economists are not optimistic about prospects for the market for new homes.

Given that existing homes are currently being sold at much more competitive prices, partly due to many of them being distressed sales, the outlook for new home sales remains fairly bleak, said Paul Dales, senior U.S. economist at Capital Economics in Toronto.

Economists had expected sales to set a 300,000-unit pace last month. All four regions recorded gains in sales last month. Compared to April last year sales dropped 23.1 percent.

Stocks on Wall Street ended down as investors worried about the economic outlook. Prices for U.S. government debt rose, while the dollar fell against a basket of currencies.

New homes account for about 6 percent of the overall housing market and residential construction is a tiny fraction of gross domestic product. Still, housing has a wider impact on the economy through its influence on consumer sentiment.

The weak housing market and high gasoline prices are hurting consumer confidence and holding back growth. Sluggish growth could see the Federal Reserve sticking to its ultra easy monetary policy stance for a while.

Fed Governor Elizabeth Duke on Tuesday indicated she was unlikely to push for higher interest rates soon. St. Louis Fed President James Bullard said growth so far this year has disappointed.

Perceptions that the economy is struggling to regain momentum after a weak first quarter were reinforced by a Richmond Fed survey showing manufacturing in the central Atlantic region stalled in May after expanding for 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 data ranging from retail sales to industrial production that have painted a picture of a lackluster recovery, with employment the only bright spot.

The government is expected to report on Thursday that the U.S. 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.

While the median sales price for a new home rose 4.6 percent in April from a year earlier, economists saw the increase as unsustainable, citing the still wide gap between between prices for newly built and used houses.

That spread was at $54,200 in April, indicating previously owned homes are selling well below the cost of construction.

There is still some room for new home prices to fall. We don't expect them to equalize, but the state of the market fundamentals suggest that we should see some further declines in new home prices, said TD Securities' Mulraine.

(Editing by James Dalgleish and Andrew Hay)