New home sales surged unexpectedly in September, climbing 3.5 percent, as low mortgage rates attracted buyers, a government report showed Wednesday.

Sales of new single-family homes rose to a seasonally adjusted annual rate of 1.206 million units, the highest level since May and the third-highest on record, from a downwardly revised 1.165 million rate in August, the Commerce Department (search) said.

Analysts polled by Reuters were expecting a 1.15 million pace.

Homes available for sale at the end of the month swelled to 404,000, the most since October 1979. But the supply of homes available for sale at the current sales pace, which many analysts consider a more reliable measure of inventories, eased to a lean 4.1 months, the lowest level since June.

Mortgage interest rates have slipped in recent weeks on fears that rising oil prices will slow economic growth. Still, new applications for U.S. home loans fell last week even as average 30-year mortgage rates decreased, the Mortgage Bankers Association (search) said earlier on Wednesday.

The trade association also forecast U.S. mortgage lending and housing activity will likely fall in the next couple of years, as mortgage rates rise gradually and the U.S. economy grows moderately.

Total mortgage supply for refinancing and home purchases would fall to $2.1 trillion in 2005 and $1.9 trillion in 2006 from an estimated $2.67 trillion for 2004, the group said.

Housing starts slowed in September after two months of gains, but building permits, an indicator of builder confidence, rose a surprising 1.8 percent, a government report showed earlier this month.