(Adds detail on interest rates, market reaction in paragraph 4-6; 11-12)
By Patrick Rucker
WASHINGTON Oct 27 (Reuters) - Sales of newly constructed U.S. single-family homes rose in September and inventories shrank as builders slashed prices to their lowest level in four years to move property as a financial crisis deepens.
The annual sales pace of 464,000 homes was up 2.7 percent from the revised August figure of 452,000, originally reported as 460,000 homes, Commerce Department data showed on Monday. Economists polled by Reuters expected the new homes sales pace to dip to 450,000 from that original figure.
The median sales price of $218,400 was 9.1 percent lower than the year-ago point and the lowest since the $211,600 level reached in September 2004, when the housing market was on the upswing.
A five-year run-up in home values ended in 2006 and has turned into a housing bust of rising foreclosures and sinking home prices. September sales were off 33.1 percent from their already deflated levels of a year ago.
For the last two years, home builders have tried to find the highest price level that will entice buyers and help them burn off an overstock of homes.
The lower prices of September seem to have attracted some buyers since the housing inventory of 394,000 was the lowest since the 383,000 homes for sale in June 2004.
Markets were spurred higher after the news but had flattened by the late afternoon.
The 7.3 percent decline in inventory from August was the sharpest on record. At the current sales pace, it would take 10.4 months to clear the overstock of homes compared to the 11.4 months reported in August.
Still, analysts said high inventories would continue to pressure prices.
"The tremendous overbuild suggests that prices will remain under year on year pressure out at least through mid-2009," said T.J. Marta, rates strategist at RBC Barclays Capital Markets in New York.
Consumer mortgage rates are also being closely watched as a major factor on the minds of prospective buyers.
For months, borrowing costs have climbed amid a global credit crunch and Washington policy-makers have had only mixed success in tapping down the costs of home loans. Rates for 30-year mortgages hovered below 6 percent in mid September but have since climbed slightly above that mark.
Across the regions, the strength of markets varied greatly with sales down 21.4 percent in the Northeast and up 22.7 percent in the West. The Midwest was down 5.8 percent while the South was up 0.7 percent.
The pace of existing home sales rose sharply in September to a 5.18 million-unit annual rate to log the first year-over-year increase in sales in nearly three years, according to a report from the National Association of Realtors on Friday.
Also on Monday, data on building permits showed a more narrow decline than first reported for September.
The Commerce Department said that permit activity had declined by 6.1 percent -- compared to the 8.3 percent decline first reported. (Reporting by Patrick Rucker; Additional reporting by Julie Haviv in New York, Editing by Andrea Ricci)