Purchases of new homes in the United States rebounded more than expected in October as buyers, particularly in the South, rushed to take advantage of a government tax credit before it expired.

Sales rose 6.2%, to an annual pace of 430,000, the highest level since September 2008, the Commerce Department said Wednesday.

The median sales price fell 0.5% and the number of unsold homes reached a four-decade low.

Rising demand shows the administration's incentive for first-time buyers, which earlier this month was extended into next year and expanded to include current owners, may help housing recover from the worst slump since the Great Depression.

Home values may remain under pressure, however, as builders are forced to compete with mounting foreclosures as unemployment climbs.

"We are getting some help from the Federal Reserve in terms of low rates, lower prices and of course the tax credit," said Ken Mayland, the president of ClearView Economics LLC in Pepper Pike, Ohio.

Sales were projected to climb to a 404,000 annual pace from an originally reported 402,000 rate in September, according to the median estimate in a Bloomberg News survey of 75 economists.

Forecasts ranged from 350,000 to 425,000. The government revised September's reading up to 405,000.

The entire sales increase was in the South, while the other three regions registered a decline.

"The South is the largest region by size, accounting for over 50% of new-home sales, so the gain is still significant, even though a broader improvement would have been more favorable," Ryan Wang, an economist at HSBC Securities USA Inc. in New York, said in a note to clients.

The median price of a new home decreased to $212,200, from $213,200 a year earlier.

Sales of new homes were up 5.1% from October 2008, the first year-over-year gain since November 2005.

Inventories dropped. The number of homes for sale fell to a seasonally adjusted 239,000, the fewest since May 1971. The supply of homes at the current sales rate decreased to 6.7 months' worth, the lowest level since December 2006.

While accounting for less than 10% of the housing market, new-home purchases are considered a timelier indicator because they are based on contract signings. Sales of previously owned homes, which make up the remainder, are compiled from closings and reflect contracts signed weeks or months earlier.

President Obama this month extended the $8,000 tax credit for first-time homebuyers to April 30 from Nov. 30, and expanded it to include some current homeowners.

Borrowing costs may stay low as Fed policymakers have signaled they will hold the benchmark interest rate near zero for an extended period.

"The housing sector continued to recover, on balance," central bankers said in the minutes of the Nov. 3-4 meeting released Tuesday.

Lower rates and stimulus efforts are reviving demand.

Existing home sales jumped in October to the highest level since February 2007, the National Association of Realtors reported last week.

The timing of the tax incentive's extension indicates existing home purchases may jump again this month, decline in December and early 2010, before picking up again, the Realtors group said last week.

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