* New home sales tumble 8.4 percent in June
* Median home price falls 3.2 percent from year earlier
* Supply of homes rises, but still near record lows (Updates markets to close)
By Lucia Mutikani
WASHINGTON, July 25 (Reuters) - New U.S. home sales recorded their biggest drop in more than a year in June and prices resumed their downward trend, dealing a setback for the budding housing market recovery.
Single-family home sales tumbled 8.4 percent to a seasonally adjusted 350,000-unit annual rate, the lowest pace in five months, the Commerce Department said on Wednesday.
The percentage decline was the largest since February 2011 and much of the drop in sales reflected a record 60 percent plunge in the Northeast, which had enjoyed hefty gains since December last year.
“Housing will continue to recover gradually throughout the year but fundamentals are not supportive of a fully fledged housing market recovery,” said Yelena Shulyatyeva, an economist at BNP Paribas in New York.
The drop in new home sales last month came on the heels of a decline in home resales during the same period.
Housing had appeared to be bucking the broad weakness in the economy, marked by a sharp slowdown in job growth and a cooling in manufacturing against the backdrop of fears of tighter U.S. fiscal policy in early 2013 and a lingering debt crisis in Europe.
While sales of both new and previously owned homes fell last month, other parts of the housing markets exhibited strength.
New home construction in June hit its highest since October 2008 and confidence among home builders this month touched its best level in more than five years, reports showed last week.
This offers cautious optimism the pullback in sales will be temporary.
“It is hard to believe that the market is turning downward when the home builders’ confidence index jumped in July to its highest level in over five years,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
“Either developers are clueless or the data have yet to catch up with reality. I am on the side of the latter.”
May’s sales pace was revised to show 13,000 more units sold than previously reported. New home sales were up 15.1 percent, compared to June last year.
The weak sales and a rare earnings stumble from Apple weighed on the Standard & Poor’s 500 index and the Nasdaq composite index.
The S&P 500 index fell for a fourth straight day, but strong results from plane maker Boeing and construction equipment maker Caterpillar lifted the Dow Jones industrial average.
U.S. Treasury debt prices fell marginally but yields held near record lows, while the dollar fell broadly.
An 8.2 percent unemployment rate and stringent lending conditions remain major challenges for the U.S. housing market.
Applications for loans to buy homes fell last week despite record-low mortgage rates, a separate report from the Mortgage Bankers Association showed.
Caterpillar forecast housing starts this year to exceed 750,000 units, a decline from its previous estimate of 800,000.
The median price of a new home fell 3.2 percent from a year earlier after rising strongly in May. The home price decline had appeared to have bottomed, with other measures of home values trending higher in recent months.
The inventory of new homes on the market increased 0.7 percent to 144,000 in June but remained near record lows. At June’s sales pace it would take 4.9 months to clear the houses from the market, up from 4.5 months in May.
New home sales last month were dragged down by the record plunge in the Northeast, which puzzled economists.
“There is no obvious explanation for the drop, but one possibility consistent with patterns in other data is that the unusually early spring boosted sales earlier and as a result the usual spring sales pop has fizzled early,” said Chris Low, chief economist at FTN Financial in New York.
Sales in the South fell 8.6 percent. In the West, sales rose 2.1 percent and were up 14.6 percent in the Midwest. (Editing by James Dalgleish)