Hope furnished by May's promising number of sales contracts were dashed last month as existing-home sales dropped in June, falling 0.8% to a seasonally adjusted annual rate of 4.77 million, a seven-month low. On an annual basis, sales were off by 8.8%.

The drop was fueled by existing condo and co-op sales, which fell 7.0% for the month and dropped 18.0% year-over-year to a seasonally adjusted annual rate of 530,000. Single-family sales held steady on a monthly basis at a seasonally adjusted annual rate of 4.24 million, but were 7.4% lower year-over-year.

The National Association of Realtors (NAR), which released the data today, pinned blame of the drop on a surprising bump in the cancellation rate, which rose to 16% in June from 4% in May. Lawrence Yun, chief economist at NAR, was unsure of the reason for the cancellation increase but pointed to tight credit and low-ball appraisals, as well as other economic factors.

But the industry's troubles run much deeper, says Patrick Newport, U.S. economist at IHS Global Insight. "Last month the [NAR's] press release blamed weather and tight credit," Newport told Builder in an email. "This month, cancellations and again tight credit are the culprits. I think sales are low because demand is weak, probably because of uncertainty over falling house prices, the job outlook, and now the debt ceiling."

Tight credit is certainly part of the mix, Newport says, but emphasizes that lending standards are partially driven by demand: Buyers' inactivity has led to falling prices, which in turn tightens credit.

Adding to the industry's woes, the lower sales rate among existing homes drove a 3.3% increase in inventory, leaving the market with 3.77 million existing homes for sale at the end of June. That number represents a 9.5-month supply at the current pace.

Despite all the grim news, prices managed to gain 0.8% from the previous year, rising to a national median of $184,000 among all housing types. Even more surpising, while condos and co-ops led the decline in sales, they also fueled most of the increase in prices. Among existing single-family homes the median price rose 0.6% on an annual basis to $184,600. The median price for an existing condo was up 1.8% from a year ago to $182,300. Overall, the improvement is likely related to the fact that distressed properties accounted for 30% of sales in June, down from 32% in June 2010.

Regionally, the numbers followed the trend set earlier this week by builder confidence numbers, with the Northeast showing the most pain. Sales there fell 5.2% on a monthly basis and 17.0% year-over-year to an annual pace of 730,000 units.

The West also declined with a drop of 1.7% from May and was down 2.6% from the previous year.

Both the Midwest and South showed gains, the Midwest besting the rest of the country with a 1.0% uptick, although still off 14.0% from June 2010. The South saw a 0.5% increase, which remaining 5.6% below June 2010.

All-cash transations accounted for 29% of June sales, with investors accounting for 19% of homes sold. First-time buyers made up 31% of the market for the month, down from 36% in May.

Claire Easley is senior editor, online, at Builder.