WASHINGTON (MarketWatch) -- U.S. home builders took a big step in September toward reducing the gigantic oversupply of homes, boosting sales slightly, slashing prices and reducing the number of unsold homes at a record pace.

Sales of new homes rose an estimated 2.7% in September to a seasonally adjusted annual rate of 464,000 in September, the Commerce Department reported Monday, close to the 460,000 pace expected by economists surveyed by MarketWatch. See Economic Calendar.

Sales surged 23% in the West, bouncing back from a similar decline in August. Meanwhile, sales in the Northeast fell to lowest level recorded in the past 35 years, and sales in the Midwest fell to a 17-year low.

Nationally, sales in September were down 33% compared with September 2007.

The inventory of unsold homes fell a record 7.3% in September to 394,000, the lowest level in four years. In the past year, inventories have fallen 25.4%, the biggest percentage drop since the government began tracking the data in 1963.

At 394,000, the inventory represents 10.4 months' worth of sales, about double the normal inventory. It's taking more than 9 months after completion for the typical new home to sell, a sign that builders have much more work to do to bring supply down to match demand.

In the past year, the number of homes for sale that were under construction has plunged by 35%.

The median sales price fell to $218,400, down 9.1% in the past year. It's the lowest median sales price in four years.

Government statisticians have low confidence in the monthly report, which is subject to large revisions and sampling and other statistical errors. In most months, the government isn't sure whether sales rose or fell. The standard error in September, for instance, was plus or minus 12.1%. Read the full government report.

The government says it can take up to five months to establish a new trend in sales. Over the past five months, sales have been on a 489,000 annual pace, 33% slower than a year earlier and about 3% lower than August's five-month trailing average.

In all of 2007, 776,000 new homes were sold, down from 1.05 million in 2006.

Regionally, sales plunged 21% in the Northeast to 22,000 annualized, the lowest pace recorded in 35 years. Sales rose 23% in the West to 108,000 annualized after plunging 30% in August. Sales dropped 6% in the Midwest to a 17-year low of 65,000 and rose 0.7% in the South to 269,000.