WRAPUP 2-U.S. new home sales hit record low, outlook gloomy

* New home sales drop 16.9 pct to record low

* Median home price lowest since December 2003

* Months' supply of homes highest in six months
(Adds details throughout, background, byline)

By Lucia Mutikani

WASHINGTON, March 23 (Reuters) - Sales of new U.S. homes
sank to a record low in February and prices were the weakest
since December 2003, showing the housing market slide was
deepening.

The Commerce Department said on Wednesday sales of new
single-family homes dropped 16.9 percent to a seasonally
adjusted 250,000 unit annual rate, the lowest since records
began in 1963, after a 301,000-unit pace in January.

Despite the surprise plunge in sales, economists did not
believe a new downturn in the housing market was underway.

"We do not believe the housing sector is on the verge of
renewed contraction. Rather, we continue to expect the recovery
in housing to be disappointingly and frustratingly slow," said
Michelle Girard, an economist at RBS in Stamford, Connecticut.

An oversupply of homes exacerbated by an increasing flood
of properties falling into foreclosure is frustrating recovery
in the housing market. The housing market has remained on the
periphery of the broader economy's expansion.

However, residential construction has declined to about 2.3
percent gross domestic product from a peak of about 6 percent
in 2005, so analysts do not see the sustained weakness in
housing derailing the economic recovery.

But it has the potential to slow growth as plummeting home
values erode consumer confidence and hurt spending.

Sales last month plunged to all-time lows in three of the
four regions and surprised economists who had expected them to
edged up to a 290,000 unit rate.

The weak data weighed on home builder shares such Toll
Brothers (TOL.N) and D.R. Horton (DHI.N), and pulled U.S.
stocks down. Prices for U.S. government debt were marginally
lower, while the dollar up against a basket of currencies.

Compared to February last year sales dropped 28 percent.

A report on Monday showed a steep drop in sales of
previously owned homes in February, with prices tumbling to a
near nine-year low.

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INSTANT VIEW-US new home sales at a record low in Feb

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New home sales graphic: r.reuters.com/kus68r

Mortgage applications graphic: r.reuters.com/gas68r
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HOUSE PRICES PLUNGE

Analysts are optimistic home sales will pick-up from their
current depressed levels in the spring, but caution persistent
declines in house prices could hold back recovery.

The median sales price for a new home plunged 13.9 percent
last month to $202,100, the lowest since December 2003.
Compared with February last year, the median price fell 8.9
percent.

"The decline in the home prices is a function of the
imbalance in the housing market, where there is a particular
concentration of distressed properties in the market," said
Michelle Meyer, an economist at Bank of America Merrill Lynch
in New York.

"The fact that home prices are falling more will keep
people on the sidelines."

Foreclosed properties typically sell well below market
value, giving builders stiff competition and forcing them to
hold back on new construction.

At February's sales pace, the supply of new homes on the
market rose to 8.9 months' worth, the highest since August,
from 7.4 months' worth in January.

There were 186,000 new homes available for sale last month,
the smallest supply of home since 1967.

Despite lean inventories, new home sales will likely
continue to bounce along the bottom for a while until the glut
of previously owned homes is whittled down. New home sales
account for less than 10 percent of overall sales.

According to the National Association of Realtors, new home
prices have been running 45 percent higher than existing home
prices, a premium that is historically about 15 percent,
indicating previously owned homes are selling well below the
cost of construction.

Separately, the Mortgage Bankers Association said
applications for home loans rebounded 2.7 percent last week.
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(Editing by Neil Stempleman)