NEW YORK (CNN/Money) - Sales of new homes in the United States fell in March following a big surge in February, while demand for long-lasting goods also fell, the government said Wednesday.

The Commerce Department said new home sales fell 3.1 percent in March to an annual rate of 878,000 units, after rising a revised 6.2 percent to a 906,000-unit pace in February. Economists surveyed by Briefing.com expected a pace of 890,000 units.

Though the drop in new home sales follows an exceptionally strong year, most economists believe the housing market, one of the few pillars of strength in the U.S. economy during the latest recession, will hold its ground.

"The new home sales rate has remained robust for a good many months already," said Frank Nothaft, economist at mortgage security firm Freddie Mac (FRE: up $0.52 to $66.29, Research, Estimates). "Certainly adding to the level of sales in the past six-to-12 months has been a very favorable level of mortgage rates, which are basically hovering around 7 percent."

Separately, the Commerce Department reported that orders for goods made to last three years or longer, such as cars and computers, fell 0.6 percent in March after rising a revised 2.7 percent in February.

Economists surveyed by Briefing.com had forecast that durable goods orders would rise 0.5 percent. The government's previous estimate for February durable goods gains was 1.8 percent.

Excluding volatile defense items, durable goods orders fell 1.2 percent in March after rising a revised 0.2 percent in February. Excluding volatile transportation items, orders fell 0.1 percent after falling a revised 1.0 percent in February.

The drop in the always-volatile headline number followed three straight gains, and indicated manufacturing's recovery from an 18-month recession and the broader economy's recovery from its first recession in a decade might not be smooth.

"Business confidence remains very, very fragile, and we're still in an environment where businesses are more concerned with cutting costs than with ramping up investment projects," Brown Brothers Harriman economist Lara Rhame said.

U.S. stock prices gained in early trading, but lost ground and fell into negative territory later in the afternoon. Treasury bond prices rose.

The pace of new home sales is down 7.9 percent from March 2001, when it was 953,000 units. It's down 11 percent from December 2001's red-hot rate of 987,000 units, a pace driven by unseasonably warm weather.

But new home sales comprise only about 15 percent of the U.S. housing market. The bulk of the market is in existing home sales, which have cooled off only slightly after a record year in 2001.

The Commerce Department reports Thursday on March existing home sales, and economists surveyed by Briefing.com expect the rate of sales to fall to an annual rate of 5.55 million units from February's pace of 5.88 million.

"The pace of sales and new construction is not a sustainable pace," said Freddie Mac's Nothaft. "Our projection is a decline in the level of home sales and construction over the course of the year from the levels in the first quarter.

"That's not to say housing is going into a recession," he added. "Absolutely not."

In fact, Freddie Mac expects the combination of new and existing home sales in 2002 to be about 6.2 million units, nearly the same as the level in 2001.

The relentless strength of the housing market has led some observers to wonder if the nation is in the midst of a speculative bubble that could pop, sending home prices plummeting.

But most economists dismiss this view, saying renewed strength in the U.S. economy will support demand, and the supply of homes is ample enough to meet demand and keep prices reasonable, while still being low enough to prevent a glut of unsold homes and keep prices from falling.

The housing market is especially crucial to the economy because home equity is such an important part of consumers' balance sheets. A hot housing market has helped boost consumer confidence and ease the pain of falling stock prices. And consumers with new homes tend to spend money on them, boosting sales of everything from furnishings to cleaning supplies.

Consumer spending made up $6 trillion of the $9 trillion U.S. economy last year and helped make the recession that likely began in March 2001 one of the shortest and mildest in history.

The median sales price for a new home fell to $176,700, the lowest price since November, from $182,900 in February. But the median price is still 6.3 percent higher than in March 2001, when the median price was $166,300.

The durable-goods orders data for both February and March were skewed somewhat by the absence of any data for semiconductors. The Commerce Department said it excluded the data, which make up about 3 percent of the total, because many chipmakers chose not to respond to the latest survey.

Nevertheless, the report seemed to justify the caution expressed recently by Federal Reserve Chairman Alan Greenspan about the size and shape of the nation's recovery from a recession that likely began in March 2001.

The recession was preceded by a dramatic slowdown in business spending on factory improvements and new technology, which followed a spending boom in the late 1990s. The spending cuts led to a deep manufacturing recession, more than a million job cuts and a glut of unsold goods sitting on manufacturers' shelves.

Businesses cut inventories at a record pace in 2001, in the hope of setting the stage for a return to production in 2002. But Greenspan said the production recovery would not take hold if there was no demand for new products.

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Gains early this year in durable goods orders and in the closely watched manufacturing index of the Institute of Supply Management raised hopes that final demand was going to justify an increase in production. But recent data showing a continuing decline in inventories and Wednesday's report on durable goods could force economists to revisit that view.

"We had a couple of gains in the sector, but ... there's a difference between a bounce and a sustained level of gains," said Rhame of Brown Brothers Harriman. "That's one of the things we're trying to find out, and it looks [right now] more like we had a bounce."

If there's a silver lining to the sluggish recovery, most economists think it means the Fed, which slashed its target for short-term interest rates 11 times in 2001, likely will leave rates lower for a longer period of time to avoid thwarting the recovery.