WASHINGTON, Aug 23 (Reuters) - Sales of new U.S. single-family homes sank more than expected in July, a sign that the housing market continued in low gear despite lower mortgage rates and a strong labor market.

The Commerce Department said on Friday new home sales dropped 12.8% to a seasonally adjusted annual rate of 635,000 units last month. It was the biggest monthly decline since July 2013.

Economists had expected a sales pace of 649,000 units.

The government’s data on new home sales tends to be volatile and subject to large revisions. June’s sales pace was revised sharply higher to 728,000 units from the previously reported 646,000 units.

New home sales last month were 4.3% higher than in July 2018. The median new house price was $312,800, down 4.5% from a year earlier.

Concerns about slowing growth, especially tied to trade tensions between the United States and China, as well as weakness in overseas economies are seen encouraging the Federal Reserve to cut interest rates in September for the second time this year.

Despite lower mortgage rates and the lowest unemployment rate in nearly 50 years supporting demand for housing, expensive materials and land and labor shortages are constraining builders’ ability to produce more affordable housing.

The housing market hit a soft patch last year and has since struggled to gain traction.

New home sales in the South, which accounts for more than half of all transactions, dropped 16.1 percent in July.

There were 337,000 new homes on the market last month, up 1.2% from June. At July’s sales pace it would take 6.4 months to clear the supply of houses on the market, down from 5.5 months in June. (Reporting by Jason Lange Editing by Paul Simao)