WASHINGTON (MarketWatch) -- Sales of new single-family homes plunged 33% in May to a record-low level after a federal subsidy for home buyers expired, according to data released Wednesday by the Commerce Department.

Sales dropped to a seasonally adjusted annual rate of 300,000, the lowest since records began in 1963. April's sales pace was revised down to 446,000 compared with the 504,000 originally reported. March's sales were also revised lower.

The results were much worse than expected, and economists had expected a 20% decline to a seasonally adjusted annual rate of 405,000. See complete economic calendar and consensus forecast.

U.S. stock markets dropped quickly on the news. Gold prices also fell. See full story on the market reaction.

That sales fell was "not at all surprising," wrote Dan Greenhaus, chief economic strategist for Miller Tabak & Co. "However, we would be lying if we said the size of the drop was not shocking."

"By the fall, we expect the very favorable affordability picture to start pulling people back into the market, but the next few months are likely to be very grim," wrote Ian Shepherdson, chief U.S. domestic economist for High Frequency Economics, who predicted the number precisely.

Sales fell sharply in all four regions, with sales down more than 50% in the West.

The median sales price in May was $200,900, down 9.6% from a year earlier and the lowest since December 2003.

Home builders continued to shed inventories in May, cutting the number of unsold homes by 0.5% to 213,000, the lowest level in 39 years. In the past year, inventories are down 27%, while sales are down 18%.

The inventory of unsold homes represented an 8.5-month supply at the depressed May sales pace, up from 5.8 months in April and the highest in nearly a year.

Home builders are facing stiff competition from a glut of inventory of existing homes, fueled by pent-up demand to move and by high levels of foreclosures and short sales.

In order to qualify for the federal tax credit of up to $8,000, a buyer needed to sign a sales contract on a home by the end of April. New-home sales are recorded at the time of the contract signing.

The tax credit likely pulled many sales forward into the first four months of the year. Sales increased a cumulative 29% between February and April. But once the credit expired, sales collapsed in May.

The big question for housing, and perhaps for the economy, is whether housing will strengthen significantly from here. If sales remain weak, home prices could fall further, which would in turn depress consumer spending, increase foreclosures and lead to more losses at banks.

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 May, for instance, was plus or minus 9.9%. Read the full government report.

The government says it can take up to four months to establish a statistically significant trend in sales. Over the past four months, sales have been on a 371,000 seasonally adjusted annual pace, little changed from the 367,000 pace in the four months leading up to January.

On Tuesday, the National Association of Realtors reported that sales of existing homes fell 2% in May to a seasonally adjusted annual rate of 5.66 million. Sales of existing homes are recorded at the time of the closing. Buyers have until June 30 to close on the sale to qualify for the tax credit. See full story on existing-home sales.

Housing data in May have been dismal. Housing starts fell 10%, building permits fell 5.9%, mortgage applications dropped, and the home builders' index fell by five points. The only bright spot was mortgage rates, which stayed very low.

"A housing market with the ability to stand on its own requires the improvement in the job market to continue and for mortgage rates to stay low," wrote Jennifer Lee, senior economist for BMO Capital Markets.