WASHINGTON (MarketWatch) - Despite a record drop in prices, sales of new homes fell 10.2% in January to a record-low seasonally adjusted annual rate of 309,000, the Commerce Department estimated Thursday.

Sales were down 48.2% compared with a year earlier, the government reported, an indication that the downturn in the housing market was still accelerating as the recession headed into its second year.

Sales were weaker than expected. Economists surveyed by MarketWatch were looking for a sales pace of about 320,000. See Economic Calendar.

Builders cut their median sales prices by a record 9.9% in January compared with December in a bid to move unsold homes. Median sales prices are down 13.5% in the past year, the largest year-over-year decline in 38 years. The average sales price has fallen a record 17.6% in the past year.

Builders are faced with intense competition from foreclosures and distressed sales of older homes. Buyers are faced with declining wealth and an uncertain labor market, offsetting lower mortgage rates that are improving affordability.

Inventories of unsold homes fell by 3.1% to 342,000, the 13th consecutive decline. However, sales are falling even faster. The inventory at the end of January represented a record-high 13.3 month supply at the January sales pace. Nearly half the homes for sale have been completed.

The builders' overstock "will keep prices falling for the rest of this year at least," wrote Ian Shepherdson, chief domestic economist for High Frequency Economics.

On Wednesday, the National Association of Realtors said sales of existing homes fell to a 12-year low in January. See full story.

Government statisticians have low confidence in the monthly report, which is subject to large revisions and large sampling and other statistical errors. In most months, the government isn't sure whether sales rose or fell. The standard error in January, for instance, was plus or minus 15.4%. 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 374,000 annual pace, 42% slower than a year earlier.

In all of 2008, 483,000 homes were sold down, from 776,000 in 2007 and 1.05 million in 2006.

The release was the third economic report of the day that was weaker than expected. "It's getting uglier by the day," said Harm Bandholz, an economist for UniCredit Markets.

In other reports, the Labor Department said initial jobless claims rose to a 27-year high of 667,000 while a record 5.1 million were collecting state unemployment checks. See full story.

Also, the Commerce Department said orders for durable goods dropped 5.2% in January, a record sixth decline in a row as U.S. factories suffer from falling demand from consumers, businesses, and foreign markets. See full story.

Details

Sales fell in three of four regions, led by a 28% decline in the West to a record low 59,000. Sales fell 6.5% in the South and fell 5.6% in the Midwest. Sales rose 12.5% in the Northeast, plus or minus 93%.

Inventories fell 3.1% overall. Inventories of completed homes dropped 4%, inventories of homes under construction fell 5%, and inventories of homes yet to be started were flat. Completed homes represented 49% of all homes for sale, up from 40% a year ago.