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By Rex Nutting, MarketWatch

RISMEDIA, Oct. 3, 2007-(MarketWatch)-Flattened by the mortgage crunch, a forward-looking gauge of home sales fell further in August to its lowest level in more than six years, a real-estate trade group said Tuesday.

The pending home sales index fell 6.5% in August after dropping a revised 10.7% in July, the National Association of Realtors reported Tuesday. The index is at its lowest level since its inception in 2001.

Pending home sales are down by 21.5% compared with a year ago and by 22% compared with six months ago.

The few economists who forecast the index had been looking for a drop of about 2.1% in August.

“This is still absolutely awful, confirming that the existing homes market is now in freefall,” wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics. “This is consistent with existing-home sales falling to just 5 million or so,” down 10% from the latest level and 30% from the peak.

The pending-home-sales index is based on signed sales contracts for existing homes. The transaction is reported as a sale when it closes, usually a month or two after the sales contract is signed.

The trade group said an informal survey of Realtors showed 10% of sales contracts in August fell through at the last minute because of canceled mortgage commitments. In some areas, 30% of contracts fell through.

“Fewer contracts were being written because of mortgage availability issues,” said Lawrence Yun, senior economist for the Realtors.

“The volume of activity we’re seeing today is below sustainable market fundamentals because some creditworthy people are trying to buy homes but can’t because of the credit crunch,” he noted.

However, Yun said he expected home sales would better reflect the fundamentals by the end of the year.

“We don’t want to suggest that housing activity has found a bottom, but we do think it is likely that pending home sales will level out at least temporarily in September,” wrote Lou Crandall, chief economist for Wrightson ICAP. “But the outlook for the fourth quarter remains murky.”

Pending sales for August dropped in all four regions. Pending sales fell by 9.5% in the South, by 8.3% in the Northeast, by 2.9% in the Midwest and by 2.7% in the West.
Through August, total sales of new and existing homes were down 14% compared with a year earlier and 26% from the peak in mid-2005.

The Realtors will report on sales of existing homes for September on Oct. 24.

Rex Nutting is Washington bureau chief of MarketWatch.