Sales of new homes unexpectedly fell to a record low in January while demand for loans to buy homes hit a 13-year low last week, fanning fears of renewed weakness in the housing market.

The Commerce Department said on Wednesday sales of newly built single-family homes dropped 11.2 percent to an annual rate of 309,000 units, the lowest level since records started in 1963, from 348,000 units in December.

It was the third straight monthly drop and the largest percentage decline in a year. Analysts, who had expected a 360,000 unit pace, said bad weather was partly to blame and warned of more of the same for February.

There is no doubt that January and February are going to be messy months for housing, given the severe weather conditions, but that does not take away from the fact that the housing sector has taken another big step back, even with government aid, said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

A separate report from the Mortgage Bankers Association showed mortgage applications fell for a third straight week, with demand for home purchase loans sinking to the lowest since 1997. Mortgage demand also was hampered by inclement weather.

Stocks shrugged off the weak housing data to end higher, cheered by Federal Reserve Chairman Ben Bernanke's reaffirmation in congressional testimony of the central bank's commitment to keep interest rates low for an extended period.

Government debt prices were little changed after a poor auction of five-year notes. The dollar fell against the euro as Bernanke's remarks cooled expectations of a rate hike.

Compared to January last year, new home sales fell 6.1 percent. Last month's drop came despite the extension of a popular tax credit for first-time buyers, which was also expanded to include repeat buyers.

TAX CREDIT HANGOVER

Some analysts said it was likely sales were still suffering from the after-effects of the initial tax credit, which had spurred sales months ago at the expense of current demand.

Sales are expected to rebound in the spring as buyers try to close purchase contracts before the credit expires in June. Analysts saw little impact from the January sales slide on the economy's recovery from the worst downturn since the 1930s.

When you step back and look at what is going on with the broader economy in terms of retail activity ... and industrial production, I think our recovery is on pace to create jobs, if not this coming month, the following month, said Craig Thomas, an economist at PNC Financial Services Group in Pittsburgh.

The $8,000 tax credit and purchases of mortgage-related securities by the Fed have underpinned the housing market's recovery from a three-year slump that had led the broad economy into recession.

Economists hope an expected turnaround in the labor market will help fill the void left by the end of the incentives. The Fed's program ends next month.

Bernanke told a Congressional panel that evidence so far suggested that even when the Fed ends its mortgage-backed securities purchasing program, it could still help prevent mortgage rates from rising.

It is true that we will stop buying new mortgage-backed securities at the end of this quarter but we will continue to hold one-and-quarter trillion dollars in agency mortgage-backed securities and taking that off the market in itself will keep mortgage rates below what they otherwise would be, he said.

One of the nation's largest homebuilders, Toll Brothers, sounded a cautious note of optimism on the housing market, saying it saw the choppy conditions gradually calming.

Homebuilders' confidence improved this month, but remains at very subdued levels.

The drop in purchase loan demand combined with a decline in refinancings to push the Mortgage Bankers Association's index of mortgage applications down 8.5 percent last week. However, a four-week moving average of loan applications, which smooths weekly volatility, was up 1.6 percent.

There were no bright spots in the Commerce Department report, however. The median sales price for a new home fell 5.6 percent last month from December to $203,500, the lowest since December 2003. That monthly decline reversed December's gain.

Compared to January 2009, the median sale price was down 2.4 percent. The number of new homes on the market rose 0.4 percent to 234,000 units last month, while the supply of homes available for sale stood at 9.1 months' worth, up from 8.0 in December. That was the highest in eight months.

(Additional reporting by Julie Haviv in New York; Editing by Kenneth Barry)

Ben Bernanke