NEW YORK (CNN/Money) - New home sales posted the biggest monthly drop in 10 years in April, coming in much weaker than economists had expected, as rising mortgage rates started biting into the nation's housing market.

The Commerce Department said new home sales fell to an annual rate of 1.09 million last month, down 11.8 percent from the revised record high rate of nearly 1.24 million in March, when mortgage rates were near a 40-year low.

Economists surveyed by Briefing.com had forecast that sales would fall to an annual rate of about 1.2 million.

"This is a sign that the housing market is not exempt from the laws of gravity," said Anthony Chan, chief economist for Banc One Investment Advisors.

"Several times in the last year we've seen mortgage rates creeping up and housing hasn't responded. Now the Federal Reserve has put some credibility behind the increase in rates. I think it set a general tone for the housing market that it'll be a lot more muted."

He projected new home sales for the year will be little changed or down slightly.

Current Mortgage Rates   Type Overnight avgs 30 yr fixed mtg 6.10% 15 yr fixed mtg 5.75% 30 yr fixed jumbo mtg 7.54% 5/1 ARM 5.92% 5/1 jumbo ARM 6.13% Find personalized rates:

A separate report Tuesday showed that existing home sales -- by far the lion's share of the nation's housing market -- rose to near record levels last month, bucking forecasts of a modest decline.

But the new home sales are closely watched by economists because they have a far greater economic impact. They create jobs in construction, and new home buyers are likely to spend more money on new appliances and furnishings than existing home purchasers.

Mark Vitner, senior economist with Wachovia Securities, noted that new home sales are reported when a contract is signed, while existing home sales are reported when the sales closes, usually weeks after a sales agreement is reached. So the new home sales number reflects the impact of rising rates much more quickly.

QUICK VOTE    Are rising mortgage rates spurring you to move more quickly to buy or sell a home?   Yes   No   Not in the market    View results

"With so many folks sensing that interest rates were rising, we probably had some sales pulled from April into March," said Vitner, who sees more strength in the new home market than Chan despite Wednesday's report.

"When all is said and done, we should still have a fairly healthy level of new home sales this year -- probably up 4 to 5 percent for the year."

Independent economist Joel Naroff said it's probably too soon to say the April drop means the start of a longer term decline in new or existing home sales.

He noted that the South showed a 22 percent drop in new home sales in April, while sales were little changed in the Northeast and actually edged up in the Midwest.

Ultimate Home Guide 2004 • Behind the hot markets • Buy now? Ughh! • Tycoons in the Making • Top housing markets

"Did sales really tank in the South or were the numbers just glitchy? There was really no pattern with the data. Prices spiked, which lends some support to the belief that the decline was not quite as massive as it seems," he said.

The median price, with half of all new homes costing less and half costing more, jumped 8.8 percent from March to a record $221,200, the department said in its report, while the average price rose 4.9 percent to $270,400, also a record.

Prices are up about 16 percent from April 2003. The price increases in April came as the inventory of new houses rose to an estimated 4.3 months supply, the largest since February of 2003.

Vitner said part of the increase in prices reflects rising material costs.

YOUR E-MAIL ALERTS Real Estate Mortgages Loan Markets or Create your own Manage alerts | What is this?

Lumber prices are up significantly, he said, and the Wall Street Journal reported last month that there is a growing shortage in cement, causing some contractors to lay off workers while waiting for supplies. That shortage is attributed partly to the growing demand in China, which is also the world's largest cement exporter.

An earlier government report showed housing starts slipped in April, but much of that decline came from a drop in construction of apartment buildings, with single-family home starts basically unchanged.

Building permits, a measure of builder's confidence in the market, increased in April.