WASHINGTON (Reuters) - Sales of new U.S. single-family homes fell in September as low inventories continue to weigh on sales even as prices saw the biggest monthly fall in five years.

The Commerce Department said on Thursday new home sales declined 0.7% to a seasonally adjusted annual rate of 701,000 units last month, matching expectations. August's sales pace was revised down to 706,000 units from the previously reported 713,000 units.

New home sales, which comprise about 11.5% of housing market sales, are drawn from permits and tend to be volatile on a month-to-month basis. Sales were up 15.5% from a year ago.

The median new house price fell 8.8% to $299,400 in September from a year ago. Prices were down 7.9% from the prior month, the biggest decline since September 2014.

The housing market has had mixed fortunes this year despite would-be homebuyers being bolstered by a reduction in interest rates. The Federal Reserve has lowered borrowing costs twice this year to offset headwinds caused by a more than year-long trade war between the United States and China, and slowing global growth.

The 30-year fixed mortgage rate has dropped more than 125 basis points since last November's peak to an average of 3.69%, according to data from mortgage finance agency Freddie Mac.

A report last week showed single-family home construction rose for a fourth straight month, and building permits also increased. But the housing market continues to struggle with a dearth of properties for sale and annual price growth that has been outpacing wage gains.

Sales of previously owned homes also fell in September as rising prices hurt sales, particularly in the lower-price end of the market, data on Tuesday showed.

New home sales in the South, which accounts for the majority of transactions, edged down 0.2% in September. Sales in the West dropped 3.8%. In the Northeast, sales fell 2.8% but there was a jump of 6.3% in the Midwest.

There were 321,000 new homes on the market last month, down 0.6% from August. At September's sales pace it would take 5.5 months to clear the supply of houses on the market, unchanged from August.

About 65% of the houses sold last month were either under construction or yet to be built.

(Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci)