SALES of new single-family homes fell more than expected in February, by 14 per cent, to the lowest level in almost three years, even though mortgage rates dipped below nine per cent for the first time in four months. All regions of the United States reported declines, according to Commerce Department figures. The largest came in the west, where sales posted the sharpest drop in 13 years as flooding devastated communities in California. 'Builders have been telling us higher interest rates are weakening demand, hurting sales, and stamping out the housing recovery,' said Jim Irvine, president of the National Association of Home Builders. Sales decreased to a seasonally-adjusted annual rate of 551,000 - the lowest since April 1992 - after rising a revised 2.6 per cent in January, the department said. A month ago, the government estimated January sales were up by 3.8 per cent. The outlook for the rest of the year was not that promising either, builders said. 'In 1995 we'll experience less business. How much less, we don't know, because signals are mixed,' said Tim Eller, president and chief executive of Dallas-based Centex Corp's housing subsidiary. Mr Eller said builders were hesitant to start new housing until the bulge in inventories of unsold homes was worked off. Economists had expected a 3.7 per cent decline in February new home sales, according to a survey. Although the economy grew at the fastest pace in a decade in 1994, there are growing signs seven Federal Reserve interest rate increases over the past 14 months have cooled consumer spending and contained inflation. Home construction is also losing steam, sales of previously-owned homes have fallen for two consecutive months, and car makers are cutting production goals. The home sales' report confirmed the Fed's view, said Robert Dederick, an economic consultant at the Northern Trust Co in Chicago. 'The Fed made its decision, and this evidence suggests they didn't make a wrong decision,' he said. However, the question remained whether the economy would grow at a more modest pace in 1995 and 1996, or slide into recession, Mr Dederick said. 'The economy is trying for a landing,' he said. 'However, the sharp decline in home sales doesn't tell us whether it's soft, hard or in-between.' Although borrowing costs are higher than a year ago, mortgage rates have moved lower since December, amid signs the Fed's efforts to control inflation are taking hold. After peaking at 9.25 per cent in December, mortgage rates fell to 8.73 per cent by the end of February and are now 8.40 per cent. But February's average monthly payment for principal and interest on a US$100,000, 30-year loan at last month's average of 8.77 per cent was $788.13 - $140 more than when rates bottomed at 6.74 per cent in October 1993. 'People simply don't feel good enough about job prospects or job security to buy a home,' said Edmund Woods, president of the National Association of Realtors. Last month, the Commerce Department reported new housing starts declined in February to the lowest level in almost a year. Permits for new construction also decreased. In addition, the National Association of Realtors (NAR) reported sales of previously-owned homes fell for the second consecutive month during February. New home sales should decline 6-7 per cent this year, and starts of new construction were likely to fall even more, by 12-13 per cent, said David Seiders, chief economist of the National Association of Home Builders (NAHB). The Mortgage Bankers Association of America said new home sales in the year were likely to drop 7.1 per cent, as starts declined 8.5 per cent. In the Commerce Department's latest report, new home sales dropped 28.5 per cent in the west in February to an annual 118,000; fell 10.7 per cent in the south to 266,000, declined 8.8 per cent in the midwest to 104,000, and eased 1.6 per cent in the northeast to 63,000.