WASHINGTON - New U.S. home sales posted a tepid 0.7 percent increase last month, missing Wall Street expectations and providing more evidence that the housing market recovery remains tentative.

The Commerce Department said Friday that sales inched up to a seasonally adjusted annual rate of 429,000 from a downwardly revised 426,000 in July. Economists surveyed by Thomson Reuters had expected a pace of 440,000.

Although it was the fifth straight increase and the strongest report in 11 months, sales were 4.3 percent lower than the same month last year. Sales have risen 30 percent from the bottom in January, but are off about 70 percent from the peak of four years ago.

The report was the second straight disappointing sign for the U.S. housing market, which is struggling to emerge from its most severe downturn in generations. On Thursday, the National Association of Realtors said sales of previously occupied homes, which make up the bulk of the market, dipped 2.7 percent last month.

While August's housing reports have been disappointing, "we believe both remain on an upward trend," wrote David Resler, chief economist with Nomura Securities.

Builders continue to make severe cuts in prices to attract buyers. The median sales price of $195,200 was off 11.7 percent from $221,000 a year earlier, and 9.5 percent below July's level of $215,600. That was the largest monthly drop on records dating to 1963.

There were 262,000 new homes for sale at the end of August, down more than 3 percent from July and the lowest in nearly 17 years.

At the current sales pace, that represents 7.3 months of supply - the smallest amount since early 2007.

The decline means builders have scaled back construction to the point where supply and demand are coming into balance.

Still, it's taking more than a year to sell the homes on the market.

"No one ever said that the homebuilders were breaking out the bubbly and party hats and doing the cha-cha around town," wrote Jennifer Lee, economist with BMO Capital Markets.

Buyers, meanwhile, are rushing to take advantage of a federal tax credit that covers 10 percent of the home price, or up to $8,000 for first-time owners.

Home sales must be completed by the end of November for buyers to qualify. Builders and real estate agents are pressing Congress for that credit to be extended.

Sales varied dramatically around the country.

The best performance was in the West, where sales rose more than 12 percent, and the worst was in the Northeast, where sales sank more than 16 percent. They were unchanged in the South, and down nearly 6 percent in the Midwest.

Meanwhile, KB Home posted a smaller third-quarter loss of $66 million on Friday as orders for new homes increased and the builder cut costs.

Though the results missed analysts' expectations, KB Home said its new orders jumped 62 percent in the third quarter from the year before, with every region showing annual growth.

Also, fewer homebuyers backed out.

The company's cancellation rate dropped to 27 percent during the quarter, compared with 51 percent a year ago.

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Originally published by Alan Zibel Associated Press .

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