updated 9/24/2008 5:34:35 PM ET 2008-09-24T21:34:35

A record decline in U.S. home prices in August attracted more buyers in some areas and led to a sizable decline in the number of unsold homes on the market, the National Association of Realtors said Wednesday.

The median sales price fell 9.5 percent to $203,100, the largest price decline on records dating to 1999. As prices fall, buyers are taking advantage of steep discounts, especially in hard-hit markets like California, Nevada and Florida.

“Time and price are the real cures for the housing market slump,” said Mike Larson, an analyst at Weiss Research.

The inventory of unsold homes fell 7 percent to 4.3 million, down from the all-time record of 4.6 million in July. That’s a 10.4-month supply at the current sales pace.

The decline, however, merits only “a small round of applause” because around five months of inventory is a more typical level, wrote Global Insight economist Patrick Newport. Also, many homeowners who don’t have to sell are likely keeping their properties off the market. At the same time, thousands of foreclosed properties are tied up in court and are not for sale yet.

Lawrence Yun, the trade group’s chief economist, said he hopes the downward trend in inventories continues because, “home prices will not stabilize as long as inventories remain high.”

Inventories have been driven higher by a massive wave of mortgage foreclosures, especially on risky loans.

Reckless lending standards during the real estate boom coupled with the current decline in home prices are the driving forces behind record mortgage defaults. They have spurred a credit crisis that has shaken Wall Street to its core and caused the Bush administration to propose a $700 billion financial industry bailout.

The Realtors hope the government’s takeover of mortgage finance companies Fannie Mae and Freddie Mac, combined with a massive purchase of distressed mortgage securities on Wall Street will ultimately make it easier for homebuyers to get a mortgage.

But with credit remaining tight and foreclosures still surging, “home prices are likely to decline considerably further in the quarters ahead,” wrote Joshua Shapiro, chief U.S. economist at MFR Inc., in a research note.

Making matters worse for buyers, mortgage rates, which fell after the takeover of Fannie Mae and Freddie Mac, have been creeping back up amid uncertainty over how the government’s intervention in financial markets would play out. New applications for home loans fell 10.6 percent last week, the Mortgage Bankers Association said Wednesday.

Existing home sales fell in August to a seasonally adjusted rate of 4.91 million units, down 2.2 percent from an upwardly revised pace of 5.02 million in July. Sales were down almost 11 percent from August last year. Without adjusting for seasonal factors, sales were down 15 percent from year-ago levels.

While buyers are pouncing on lower prices — especially in places like California, Florida and Nevada — sales are sluggish in formerly stable markets like the Pacific Northwest and Charlotte, N.C., Yun said.

Dave Lenderking, 67, saw his house in Holly Springs, N.C., sit on the market for four months before taking an offer $50,000 lower than his original listing price of $565,000.

“It was the only offer I had,” said Lenderking, who is in the process of moving to retirement community in Virginia. “Mentally I was just ready to move on.”

The rate of home sales fell from July to August in the Northeast and West, which posted 6.6 percent and 5.3 percent sales declines, respectively. Sales rose by less than 1 percent from July to August in both the Midwest and South.

Meanwhile, the Bush administration sought Wednesday to overcome obstacles to its plan to rescue financial firms and restore confidence in the credit markets. Real estate industry groups lined up behind the administration’s plan.

“The flow of credit has been severely curtailed for housing and other sectors of the economy,” Sandy Dunn, president of the National Association of Homebuilders said in a statement. “There’s no time to waste.”

The Mortgage Bankers Association wants to kill an effort by Democrats to allow bankruptcy judges to rewrite mortgages to ease the burden on borrowers facing foreclosure. John Courson, the group’s chief operating officer, wrote in a letter to lawmakers that the change “will inevitably raise the cost of credit.”

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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