Sales of new U.S. homes rose in March and the number of new properties on the market was its lowest since the 1960s, but further gains will be hampered by the broader property glut.

Single-family home sales rose 11.1 percent to a seasonally adjusted annual rate of 300,000, the Commerce Department said on Monday, up from a near record low pace of 270,000 in February when harsh winter weather hit the economy.

Analysts had expected a 280,000-unit rate in March.

The market for new homes is being squeezed by competition from previously owned homes and a deluge of foreclosed properties, even though inventories of new properties in March fell to 183,000 units -- the lowest since August 1967.

Builders, hurt by the weak market, are holding back on new home construction.

Home sales are stabilizing but we continue to see housing demand as moving sideways, more than accelerating in 2011, said Prajakta Bhide, a research analyst at Roubini Global Economics in New York.

The report comes as top Federal Reserve officials prepare to meet on Tuesday and Wednesday to assess the economy amid signs that activity slowed sharply in early 2011.

Though the U.S. central bank is expected to continue its $600 billion government bond-buying program which ends in June, debate is most likely to focus on the next steps the Fed should take with the monetary stimulus it has lent the economy.

While housing now accounts for a fraction of gross domestic product, indications that it continues to struggle may weigh on consumer confidence and have a negative impact on spending.

Standard & Poor's Ratings Services described conditions for U.S. homebuilders as still tough and said it did not expect a significant improvement until next year.

SUPPLY ELEVATED

A report last week showed there were 3.55 million previously owned homes on the market in March, well above the natural rate of between 2 million and 2.5 million.

Including foreclosed homes and those on the verge of being repossessed by banks, economists say supply is anywhere in the range of 8 million to 9 million.

Existing home sales rose to an annual rate of 5.10 million last month. The new home market accounts for less than 10 percent of the overall housing market.

Underscoring the risks for new homes, distressed properties accounted for 40 percent of existing home sales last month. Such sales typically occur at 20 to 30 percent below value.

We are not going to see a snap back in the housing market, we have a long way to go before we see anything close to a normal housing market, said Robert Dye, senior economist at PNC Financial Services in Pittsburgh.

U.S. financial markets were little moved by the data.

The overall housing market has been hamstrung by a scarcity of jobs and will likely continue to cast a shadow over the broader economy. Bad weather depressed new home sales in the first two months of the year and held back building activity.

The government is expected to report on Thursday that overall economic growth slowed to a 2 percent annual pace in the first quarter of 2011, according to a Reuters survey, after a brisk 3.1 percent in the last three months of 2010.

Much of the anticipated slowdown is blamed on the bad weather that blanketed large parts of the country in January and February and a spike in gasoline prices.

A separate report on Monday showed manufacturing activity in the Texas area slowed in April. Reports on regional factory activity so far have been too mixed to give a clear new picture of the sector, which took a breather in March.

Manufacturing has led the recovery but with the labor market showing some signs of strength, there is cautious optimism that resales could see some modest gains.

A recovery for the new home sales market remains far off. The median sales price for a new home fell 4.9 percent in March from a year earlier to $213,800. The spread between the prices of new and previously owned houses is now about $54,200, off a record high of $80,500 reached in January.

Existing home sales are so low that this robs demand from the new housing sector, said Yelena Shulyatyeva, an economist at BNP Paribas in New York.

At March's sales pace, the supply of new homes on the market fell to 7.3 months' worth from 8.2 months in February.

(Editing by James Dalgleish)

BNP Paribas