That's a sign the closely watched housing market is weakening from its extremely strong performance in the first seven months of the year. Sales of new single-family homes have fallen three months in a row since a record 919,000 pace in June.
Earlier this week, the National Association of Realtors said sales of existing homes also fell 1 percent in September to an annual pace of 4.68 million.
Wall Street economists were expecting new home sales to rebound to a 850,000 pace.
In a separate report, the Commerce Department said the gross domestic product rose at a 3.3 percent annual rate in the third quarter, much faster than expected.
The stock of unsold houses rose 2 percent to 292,000, the most since February 1997. The stock represents a 4.3-month supply at the current sales pace.
In September, new home sales rose 13 percent in the Midwest to a 175,000 pace. Sales dropped 5 percent in the West to a 224,000 pace. Sales fell 3 percent in the Northeast (to a 71,000 rate) and in the South (to a 353,000 rate).
Driven by 30-year lows in interest rates and strong income growth, the housing market has been booming all year, with 684,000 homes sold in the first nine months. If that trend continues, 912,000 homes would be sold in 1998, besting 1997's mark of 804,000.
Since June, however, the stock market has stumbled and consumers are beginning to lower their expectations for the economy, slowing the growth in new home sales.
Written By Rex Nutting