New home sales posted an unexpected increase in September.

WASHINGTON (AP) -- New home sales posted an unexpected increase in September. Analysts viewed the small gain as highly questionable given the severe credit crunch that rocked the housing industry this summer.

The Commerce Department reported Thursday that sales of new homes rose by 4.8 percent last month to a seasonally adjusted annual rate of 770,000 units. Economists had looked for a 2.5 percent decline.

But analysts noted that the increase came in a report in which the government revised the performance over the past three months sharply lower, showing that sales in August fell to an annual rate of just 735,000, the slowest pace in 11 years.

Sales of new homes surged by 37.7 percent in the West, a highly suspect rebound given what was happening in the market for large loans. Sales rose 0.5 percent in the South but were down in the rest of the country, falling 19.5 percent in the Midwest and 6.6 percent in the Northeast.

Seiders said the pattern this year has been that the government substantially lowers its initial estimate of home sales once more complete data is gathered.

The National Association of Realtors reported Wednesday that sales of existing homes fell by a record 8 percent in September, a far more than expected.

Analysts said home sales are likely to continue to fall for some time to come, with the housing market not stabilizing until inventories come under better control. That problem has been exacerbated by the rising number of homes going into default, which pushes more homes onto an already glutted market.

"We are expecting sales to continue to drop and not turn around until next year," said Patrick Newport, an economist at Global Insight.

The congressional Joint Economic Committee released a report Thursday estimating that 2 million subprime mortgages made to borrowers with weak credit could go into foreclosure over the next 18 months.

The report on home sales showed that the median new home price in September -- the point where half the homes sold for more and half for less -- rose to $238,000, 2.5 percent more than in from August.

Economists said the price increase was skewed by the fact that most of the sales gains were in the West, where home prices are generally more costly.

Many analysts believe that the chance of a recession has increased but they remain confident that the Federal Reserve can head off an outright downturn with further cuts in interest rates. The Fed cut a key rate for the first time in four years in September; Fed officials will meet again next week.

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