updated 3/26/2007 6:11:52 PM ET 2007-03-26T22:11:52

Sales of new homes fell for a second consecutive month in February, dimming hopes for a rebound soon in the troubled housing market and raising fears about the health of the overall economy.

The Commerce Department reported Monday that sales of single-family homes dropped 3.9 percent last month to a seasonally adjusted annual rate of 848,000 units, the slowest pace in nearly seven years.

The decline followed a 15.8 percent plunge in January, the biggest one-month decline in 13 years.

The weakness in sales was accompanied by a drop in prices with the median price of a new home falling to $250,000 in February, down 0.3 percent from a year ago.

The report was far weaker than Wall Street had been expecting and raised concerns that rising mortgage delinquencies and foreclosures, especially in the subprime market, would further depress housing activity in the months ahead as nervous lenders tighten their standards.

The Dow Jones industrial average fell 11.94 points Monday to close at 12,469.07 as investors reacted to the disappointing home sales report.

Concerns about financial difficulties facing many lenders in the subprime market, designed for borrowers with weak credit ratings, contributed to a 416-point plunge in the Dow average on Feb. 27.

“Lending standards apparently are tightening not only in the subprime market but in other components of mortgage lending as well and this is creating tremendous uncertainties regarding the near-term outlook for home sales and housing production,” said David Seiders, chief economist for the National Association of Home Builders.

Sales were down in every region of the country except the West.

In addition, the government revised sales information for the previous three months to show weaker activity than previously reported.

The number of unsold homes shot up to 546,000 units. It would take 8.1 months to eliminate that backlog of unsold homes at the February sales pace, the longest period for this measurement in 16 years.

Economists predicted further downward pressure on prices in the months ahead until the number of unsold homes is lowered to more normal levels.

Patrick Newport, senior economist at Global Insight, said he expected that housing, which has been a major factor reducing overall economic growth, will probably trim growth rates by about 1 percentage point for all of 2007.

“The housing market is weak,” he said. “Our view is that housing will not turn around until next year.”

By region of the country, sales were up 24.6 percent in the West, a rebound after a 25.8 percent plunge in January.

Sales fell by 26.8 percent in the Northeast and were down 20 percent in the Midwest, two areas that were hit by snowstorms last month. Sales were down 7 percent in the South.

The performance of new home sales was in contrast to a report last week that sales of existing homes rose in February. Sales of existing homes are counted at the home closing when ownership changes hands while new home sales are recorded when the contract is signed.

Since there can be a lag of one to two months between when the contract is signed and the closing, analysts said the rise in existing home sales in February reflected warmer-than-normal weather in December and January.

The back-to-back declines in the new home market served to support the forecasts of private analysts who believe the slowdown in housing has more months to run its course.

The housing bust is coming after a boom in which sales of both new and existing homes set records for five straight years.

Some analysts see the current slowdown as a correction from a period of speculative frenzy in which investors were buying second homes in hopes of reselling them quickly to make profits.

The slowdown in housing is occurring following a two-year effort by the Federal Reserve to raise interest rates as a way of slowing the economy and keeping inflation pressures from getting out of control.

Last week, the Fed bolstered spirits on Wall Street with a signal that it might consider cutting interest rates if the economic slowdown threatens to worsen.

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