Sales of previously owned homes fell 8 percent in September to a record low 5.04 million unit pace according to a report released Wednesday by the National Association of Realtors (NAR). Lawrence Yun, a NAR senior economist, says the crisis in the mortgage and credit markets contributed to September's weak numbers.

"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," Yun said. "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."

September's sales pace is the lowest since NAR began tracking both single-family and condo sales jointly in 1999.

Single-family sales were off 8.6 percent for the month, while condominium sales fell 4.3 percent. Sales fell in all four regions, with the Northeast (down 10 percent) and the West (down 9.9 percent) taking the biggest hits followed by the Midwest (7 percent) and the South (6 percent).

September's supply of existing single-family homes rose from 9.3 to 10.2 months, its highest reading since February 1988.

According to Global Insight economist Patrick Newport, in order for inventories to come down significantly and for the housing market to get back on track, either prices or housing starts must drop much more from current levels. In addition, Newport predicts that "sales in October may be as ugly as September's."

"Afterward, the drops will be smaller," Newport adds. "How quickly housing prices drop is crucial in determining the turnaround. Our view is that prices will drop sufficiently for housing activity to hit bottom in mid-2008. However, between now and then, housing starts and sales may drop more than 10 percent from current levels."