updated 9/27/2006 12:04:02 PM ET 2006-09-27T16:04:02

Sales of new homes posted the biggest increase in five months in August, raising hopes that the steep slide in the housing industry may be leveling off.

Sales of new single-family homes increased by 4.1 percent last month to a seasonally adjusted annual rate of 1.05 million units, the Commerce Department reported Wednesday. It was the biggest increase since an 8 percent gain in March.

The August rise followed a 7.5 percent plunge in sales in July, which had registered the third straight decline.

The gain was far better than the 3 percent decline economists had been expecting and could signal that housing is beginning to level off after a steep slide. However, the price of homes sold in August fell to $237,000, down 1.3 percent from August 2005. It was the biggest year-over-year price decline in more than three years.

From 2001 through 2005, housing enjoyed five consecutive years of record sales, propelled by the lowest mortgage rates in more than four decades.

However, this year sales have been falling as mortgage rates rose and the economy slowed. The drop in sales and construction of new homes has been so sharp that some economists have worried that it could plunge the country into a recession.

But other analysts argue that recent declines in mortgage rates should help put a floor on the housing decline.

The increase in new home sales contrasted with earlier reports showing that sales of existing homes fell in August for a fifth straight month while construction of new homes and apartments dropped by a sharp 6 percent last month.

Sales of new homes were up in every region of the country except the West, where they dropped a sharp 17.7 percent. Sales rose 21.7 percent in the Northeast, 12.2 percent in the Midwest and 11.1 percent in the South.

In other economic news, the Commerce Department reported that orders to U.S. factories for big-ticket manufactured goods fell for a second consecutive month in August, marking the first back-to-back declines in more than two years.

Demand for durable goods dropped 0.5 percent last month to $209.7 billion. The $1 billion drop from July, when orders had fallen an even bigger 2.7 percent, reflected a plunge in demand for computers and other electronic products.

The August performance was worse than had been expected and was certain to raise concerns about whether weakness in manufacturing could contribute to a bigger slowdown in overall economic growth.

For August, demand for computers and electronic products dropped by 4.7 percent or $1.5 billion.

Demand for cars, airplanes and other transportation products was up 3.7 percent, as strength in autos offset further weakness in commercial aircraft.

Demand for motor vehicles rose by 4.4 percent last month while orders for commercial aircraft fell by 21.9 percent. Orders for military aircraft rose by 9.8 percent.

Excluding the volatile transportation sector, orders were down 2 percent, the biggest setback in this category in 13 months.

Orders for non-defense capital goods, considered a good indication of company plans to expand and modernize, fell by 3.5 percent last month after a 0.6 percent decline in July.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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