WRAPUP 1-U.S. new home sales drop to near two-year low in September

* New home sales fall 5.5 percent in September

* Sales decline in South, West and Northeast

* Median new home sales price drops 3.5 percent from year ago

WASHINGTON, Oct 24 (Reuters) - Sales of new U.S. single-family homes fell to a near two-year low in September and data for the prior three months was revised lower, the latest indications that rising mortgage rates and higher prices were undercutting the housing market.

The Commerce Department said on Wednesday new home sales dropped 5.5 percent to a seasonally adjusted annual rate of 553,000 units last month. That was the lowest level since December 2016. August's sales pace was revised down to 585,000 units from the previously reported 629,000 units.

June and July sales rates were also revised lower. New home sales have now declined for four straight months.

Economists polled by Reuters had forecast new home sales, which account for about 9.7 percent of housing market sales, falling 1.4 percent to a pace of 625,000 units in August.

New home sales are drawn from permits and tend to be volatile on a month-to-month basis. They declined 13.2 percent from a year ago.

U.S. financial markets were little moved by the data.

Hurricane Florence likely weighed on new home sales in the South, which decreased 1.5 percent in September to their lowest level since August 2017. The South accounts for the bulk of transactions and covers North and South Carolina, which were lashed by the storm in mid-September. Sales in the South have now decreased for four straight months.

Sales tumbled 12.0 percent in the West to a two-year low and plunged 40.6 percent in the Northeast to their lowest level since April 2015. They rose 6.9 percent in the Midwest.

HOUSING WEAKENING

The weak new home sales came on the heels of reports last week showing declines in homebuilding, permits and housing completions in September. In addition, sales of previously owned homes dropped to a near three-year low in September.

A survey last week showed confidence among single-family homebuilders rose in October, but builders said "housing affordability has become a challenge due to ongoing price and interest rate increases."

The housing market has underperformed a robust economy and analysts blame the sluggishness on the more expensive home loans and higher house prices, which have outstripped wage growth, making home purchasing unaffordable for some first-time buyers.

The 30-year fixed mortgage rate has increased more than 80 basis points this year to an average of 4.85 percent, according to data from mortgage finance agency Freddie Mac. House prices rose 5.9 percent in July from a year ago.

While wage growth has picked up in recent months as the labor market tightens, the annual increase remains below 3 percent. Mortgage rates are likely to rise further, with the Federal Reserve expected to raise interest rates in December for the fourth time this year.

Residential investment contracted in the first half of the year and is expected to have declined further in the third quarter. The government will publish its snapshot of third-quarter gross domestic product on Friday.

A separate report on Wednesday from the Mortgage Bankers Association showed applications for loans to purchase a home rose 2 percent last week. Applications, however, remained 4 percent lower than two weeks ago.

The median new house price fell 3.5 percent to $320,000 in September from a year ago. There were 327,000 new homes on the market in September, the most since January 2009 and up 2.8 percent from August. Supply is, however, just over half of what it was at the peak of the housing market boom in 2006.

At September's sales pace it would take 7.1 months to clear the supply of houses on the market, the most since March 2011, compared with 6.5 months in August.

Nearly two-thirds of the houses sold last month were either under construction or yet to be built.

(Reporting by Lucia Mutikani)