* New home sales fall 1.6 percent in Feb to four-month low * Median price surges 8.3 percent to eight-month high * Prices up 6.2 percent from year-ago By Lucia Mutikani WASHINGTON, March 23 (Reuters) - The battered U.S. housing market looks to be on the mend as buyers make a tentative return and house prices stabilize. Sales of new homes in February fell from January but jumped more than 11 percent compared with the same month last year and prices rose, according to data released on Friday that was in line with other recent signs of a slow recovery. Big challenges lie ahead, most notably in the form of a glut of unsold properties - many of them foreclosures - and tight lending by banks. But even if the recovery is slow and bumpy, the worst of the six-year slump seems to be over. "The housing market is slowly coming back. It's still a depressed market, but it's getting better. We have a long way to go," said Patrick Newport, an economist at Global Insight in Lexington, Massachusetts. New home sales slipped 1.6 percent to a seasonally adjusted 313,000-unit annual rate in February, the lowest since October, but were up 11.4 percent in year-on-year terms, the Commerce Department said. The median new home price jumped 8.3 percent to an eight-month high of $233,700. Compared with February last year, the rise was 6.2 percent. The report rounded off a week of mixed U.S. housing data and followed a similar pattern seen in the bigger market for existing homes - sales also fell in February, but stayed close to their highest level in nearly two years and prices rose for the first time on a yearly basis since November 2010. Realtors say they are seeing higher traffic volume and are moving more houses off the market than a few years ago. "My listings are selling much more quickly compared to the past few years, even approaching 2007 pre-crash levels," said Lindsey Sanders, a Realtor with Muffley & Associates in Atlanta. "I began seeing a meaningful uptick in open house traffic last summer and it has continued to improve. I think this is a combination of sellers finally becoming more willing to ask market prices for their homes instead of bubble-level prices." Builders tell a similar story. An index measuring confidence among homebuilders held at a near four-year high this month and they anticipated an increase in sales over the next six months. While the pace of home construction fell last month, permits for future projects approached a 3-1/2-year high. Much of the activity is concentrated in the multi-family segment, as demand for rentals soars. SPOTTY RECOVERY The recovery remains spotty. According to CoreLogic , for every two homes sold, there is one that could be foreclosed. It estimated the so-called shadow inventory of homes at 1.6 million in January, down from 1.8 million a year ago. KB Home, the fifth-largest U.S. homebuilder, on Friday said net orders for new homes declined 8 percent in its first quarter as cancellations rose. "Don't expect this to be a broad-based, rocket-ship recovery," said KB Homes Chief Executive Officer Jeff Mezger on an earnings call. "The overall housing market is better, but this is definitely a localized recovery ... and in some cases, it's a zip-code-by-zip-code recovery." KB's order decline was in sharp contrast to the strong order growth reported by other U.S. homebuilders, including D.R. Horton, Pulte and Lennar, who have forecast an improving housing market. While the pace of new home sales held above 300,000 units for a sixth straight month, they are just over a fifth of their 1.389 million unit peak reached in July 2005. "Mindful that more healing needs to be done, we expect new home sales in 2012 to post their first annual increase in seven years, rising 12 percent," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. Last month, the inventory of new homes on the market was unchanged at a record low 150,000 units. At February's sales pace it would take 5.8 months to clear the houses from the market, up from 5.7 months in January. New home sales last month surged in the Northeast and West but slumped in the South and Midwest. New home sales account for about 7 percent of the overall housing market and face stiff competition from the used home segment despite low levels of stock. "Buyers have been able to take their time as they have little fear that prices or rates will get away from them. Mortgage rates, though, are beginning to rise slowly and that could continue through the rest of the year," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "Add price increases to that and there is a little more urgency to the decision. So while investors may be disappointed by this report, I think better times are just about here so be a little more patient."