Lenders such as Countrywide have announced programs to help troubled mortgage holders, which may improve the outlook for the remainder of the year, but September's housing sales illustrate how badly the credit markets froze during July and August.

In its latest monthly housing sales report, the National Association of Realtors says that home sales fell eight percent in September to a seasonally adjusted annual rate of 5.04 million units sold. That's down 19.1 percent in volume from September 2006, creating the largest inventory (10.5 months on-hand ) in 12 years. A balanced market is considered to be six months of housing inventory on hand, which means it would take six months to sell that inventory to zero homes left for sale.

Mortgage interest rates were more favorable in September, down to 6.38 percent from 6.57 percent in August, for a 30-year conventional fixed-rate loan, but that didn't help buyers get commitments from lenders in August when home sales contracts were being negotiated, says Lawrence Yun, NAR senior economist.

"Mortgage problems were peaking back in August when many of the September closings were being negotiated, and that slowed sales notably in higher priced areas that rely more on jumbo loans,” says Yun. “The good news is that mortgage availability has markedly improved in recent weeks with interest rates on jumbo loans falling, and more people are applying for safer and conforming FHA mortgage products. Some of the cancelled transactions will move forward as buyers apply for other loans.”

Still, the third quarter finished better than expected, with a 5.42 million annual rate of existing-home sales versus the 5.38 million forecast by NAR.

Always in real estate the news is good for someone, and that someone is any buyer. Bets are on that the Fed will lower short-term interest rates by about a point as its Halloween treat. Mortgage interest rates are tied to mortgage-backed securities, long-term rates that may fall significantly by the end of the year.

Interestingly, condominium and coop sales fell more slowly (4.3 percent) than detached single-family home sales (8.6 percent). The median condo was up 1.4 percent in price ($221,700) from a year ago, while the median single-family home dropped 4.9 percent to $210,200.

That could mean that absorption is starting to pick up in the non-owner occupied investment and second home category.

The news was worse in California, which is helping to weigh down the national numbres. Approximately one out of ten U.S. homeowners lives in California, so sales of homes decreasing 38.9 percent in September year-over-year is significant. The California Association of Realtors also reported that home prices declined (4.7 percent) at the largest month-to-month rate on record.

Explained C.A.R. President Colleen Badagliacco, "California’s sales fell more steeply than those of the U.S. as a whole because of its heavy reliance on jumbo loans -- those above the conforming loan limit of $417,000,” she said.