The inventory of new U.S. homes for sale at the end of the March plummeted at a record pace, government data showed on Friday, bringing a glimmer of hope of improvement in the housing market even as data on durable goods sales showed weakness in the economy as a whole.

Housing is probably forming a bottom, because even the supply of homes, the inventories, declined, said Asha Bangalore, an economist with Northern Trust in Chicago. I think the housing market is stabilizing.

The stock of new homes shrank to 311,000 from 328,000 in February. That left the supply of homes available for sale at 10.7 months' worth, compared to February's 11.2 months.

The Commerce Department said the monthly change in inventories, of 5.2 percent, was the largest drop in more than 45 years and the year-on-year plunge of 33.7 percent was the largest on record.

Builders appear to be burning through their supply and holding off on adding to their stocks. A separate Commerce Department report on Friday showed that applications for permits to build new homes dropped 8.5 percent in March from February and were off 44.6 percent from March 2008.

Sales of new homes dropped 0.6 percent in March, according to the Commerce Department, but February sales were much stronger than originally thought, with the report showing they rose 8.2 percent, compared to the 4.7 percent gain previously registered.

What we are seeing on a moving average basis is a gradual improvement from very low numbers in new home sales, said Kurt Karl, chief U.S. economist for Swiss Re in New York. It's not taking off like a rocket, but it's not looking to be heading south either.

U.S. equity indexes extended their gains after the report was released, while U.S. Treasury debt prices fell.

The March drop brought home sales to a 356,000 annual pace. Analysts polled by Reuters had forecast sales at 340,000.

The median sales price for a new home fell to $201,400 from $208,700 in February. The average price, however, rose slightly to $258,000 from $255,100.

Still, a separate report on new orders for long-lasting manufactured goods in March showed the recession that has ground on for more than a year in the United States may not yet be abating.

It confirms that conditions in the economy remain weak, the economy is still contracting, but it suggests it's doing so at a slower pace, which is something that we have seen from a number of indicators, said Anna Piretti, senior economist at BNP Paribas in New York.

According to the Commerce Department, U.S. durables goods orders fell 0.8 percent, which was much slimmer than the 1.5 percent drop analysts polled by Reuters were expecting.

Orders have now fallen for seven months out of the last eight, the Commerce Department said. The sole rise in that period, in February, was revised to 2.1 percent from the 3.5 percent previously reported.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, gained 1.5 percent in March after rising 4.3 percent in February.

Transportation equipment orders experienced the largest drop in March, the Commerce Department said, falling 1.4 percent to $37.9 billion. That category has now dropped for five of the last six months.

Jack Bauer, a senior economist at Manning & Napier in Rochester, New York, said the key to economic recovery would not be found in orders for manufactured goods.

You want to see the financial sector stabilize, he said. That is the first thing you would need to see the economy improve.

(additional reporting by John Parry and Herb Lash in New York)

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