By AUSTIN NELSON

The National Association of Realtors (NAR) posted its monthly Pending Home Sales Index for September today, showing a pullback in the gains seen in last month’s report. The index, touted as “a leading indicator of housing activity,” is based on signed housing contracts. These contracts are not counted as sales but are taken as an indication of future sales data.

Specifically, the data show the following:

Month over month (seasonally adjusted)

• US: -4.6%
• Northeast: -16.8%
• Midwest: -0.7%
• South: -7.9%
• West: +3.7%

Year over year (seasonally adjusted)

• US: 1.6%
• Northeast: -9.4%
• Midwest: -3.1%
• South: -11.3%
• West: +39.5%

These monthly declines come following gains in August numbers (US up 6.5%). In last month’s report, the NAR pointed to the monthly figures as a sign of housing market recovery, but this month’s reversion evidences the continuing weakness of the market as a whole.

Now the polyannas at the NAR are choosing to focus instead on the year-over-year increase in the overall market, saying it indicates “we’re still in a broad period of stabilization.” However, the west region has shown a resurgence in sales and contracts are up almost 40% over this time last year, which is single handedly propping up the overall US numbers.

Taking the west out of the picture shows the US housing market as a whole continues to slide, where previously strong markets are beginning to show weakness in the face of continued economic crisis. The west is simply further along in the process of extreme market correction.

It is important to remember that this index should be taken with two very large grains of salt. The first is that these indices are based on housing contracts and do not represent completed sales. Fallout rates remain high, especially amidst a difficult lending environment.

The second, and more important, is that while sales volume may be stabilizing in some areas, sales prices are still unstable. With inventories continuing to hover at near record levels, downward pressure will still be exerted on home values.

Finally, unemployment data released today by the labor department indicate that unemployment is at a 14-year high of 6.5%. There is no reason to expect that this number will go down any time in the near future, as our economy is still locked into a death spiral of bad debt and tight credit.

This isn’t 2006 anymore, people who don’t have jobs don’t buy houses.

The former Goldman Sachs employees — err, the federal government — have decided to bail out Fannie and Freddie and the race to call another bottom in equities, not to mention housing, is on.

Reality, however, is not a friend of these hopeful bulls.

Let’s take a quick scan of the economic landscape and see what issues the latest bailout has solved.

• - The unemployment rate seems to only be going up, and unless the new federal agency charged with keeping tabs on the two mortgage giants is hiring en masse, there won’t be much of a change here.
• - The dollar could see its recent rally erased after our trading partners and investors around the world come to terms with the $200 billion the Treasury department just dumped into the blender to cut 50 bps off mortgage rates. And, take note, those are prime, Agency rates, and that’s it.
• - The unfortunate reality is that most Americans are still in debt and cannot afford a down payment on a house, a requirement that’s yet to be removed.
• - Gas prices have fallen, but not by as much as crude prices. Hurricane season is alive and well, threatening most of the gulf oil rigs. Oil companies are already under pressure from tumultuous markets for their black gold and are not likely inclined to lower prices further.

As painful as it is to admit, Fannie and Freddie probably needed to be bailed out to keep the entire financial market from collapsing but it doesn’t mean we are at “the bottom.”

It takes awhile for a fundamental shift in lending to play its way out and that is what we are in the middle of. The middle class is being squeezed more than ever and consumer credit quality on the whole is not going to start improving tomorrow.

More important than any of these points is we do not know what our friends at the government are going to do with Fannie and Fredie and how long it is going to take them to do it. In fact, trusting the very folks who ran these companies into the ground — albeit under different leadership — to turn them around is hardly a comforting proposition.

In the end, we need to remember that you need a good credit score and a down payment to buy a house in the real world. So no matter what a television analyst on TV who makes $500,000 a year tells you, this credit crisis is far from over.

This post first appeared on Minyanville and our sister site Dawn Patrol.

After leading the banking sector to its largest ever one-day drop yesterday, Washington Mutual (WM), in an effort to assuage concerns that it’s facing a cash crunch, released a statement claiming that the bank is “well-capitalized.”

Though the stock bucked the trend this morning as the broader financial complex continued its unrelenting sell-off, shareholders aren’t likely to be comforted by the WaMu’s pleas for calm.

The largest savings-and-loan in the country has seen share prices fall below $4 following the seizure of IndyMac (IMB) by benevolent federal banking regulators; investors fear WaMu could be next.

IndyMac was reopened on Monday to handle endless lines of depositors hoping to recover their pennies from the bank’s coffers.

In a stark reminder of just how dicey bottom-picking can be, Bloomberg reminded us that private-equity firm TPG led a consortium of investors in providing the bank with $7 billion in much-needed cash in April, when the stock traded at $13. Those daring saviors have seen most of their investment wiped out.

TPG did, however, slip a protective clause into the deal: If the stock drops below $8.75 — which it clearly has — TPG is owed the difference, effectively putting the bank on the hook for its own equity losses. While protecting TPG’s investment, this feature also makes it considerably more costly, if not impossible, for the bank to raise more capital, which would further dilute shares.

As more details emerge about these and other onerous terms with which banks have been forced to agree in their efforts to raise capital, it’s becoming clear just how misguidedly optimistic investors were when such deals were first announced. Banking expert Minyan Peter wrote of the WaMu deal:

“I think the problem for most market participants right now is the assumption [that] what we’re experiencing looks something like ‘their prior experiences in banking crises.’ And to me, that’s why we have seen such a big rally over the past two weeks — because, based on prior experience, a rally feels very right, right about now.

But for all the reasons I shared before, this one is different.”

We’re now seeing just how different this one is.

Professor Depew explained Friday how the Fannie Mae (FNM) and Freddie Mac (FRE) crisis is different from the Long-Term Capital Management failure in 1998: In this case, massive losses by financial institutions around the world are a symptom, not the cause.

A few misplaced bets aren’t to blame for the market turmoil; neither is rumor-mongering. The financial system’s problems, and by extension the economy’s, are rooted in years of mispriced risk and excessive leverage. Markets are now witnessing the destruction of that debt at a rate that’s stomach-churning to the traditional buy-and-hold investor.

The process, though painful, is necessary. The debt will be destroyed, firms will go out of business and the economy will slow, if not contract. All this is healthy. Agonizing, to be sure, but healthy.

As Toddo wrote yesterday on the Buzz and Banter, “The big picture blues will lead to an unfortunate destination, but that’s necessary to rebuild the foundation for sustainable economic growth. Once we get there, those with capital will be in a fantastic position to prosper.”

Click here for details on this House of the Day

Value: $250,000
Projection: Depreciating

Fallbrook is located in Eastern San Diego County, just south of Temecula along Interstate 5. The city and the surrounding area are being adversely effected by the economic slowdown, as much of the growth in the area was due to new home construction. High gas prices are also weighing on consumer spending in an area dominated by commuters. As a result, home prices have fallen dramatically from their peak in late 2005 and continue to fall.

Our property is centrally located, making it more desirable than those on the outskirts of town. There are, however, many listings in the subject’s immediate vicinity. The property also requires some “TLC,” which indicates its condition is likely inferior to its neighbors. Listings in the area range from $273,900 – $549,000. Only three properties have sold in the area since April 15th, all of which are superior in quality to the subject.

515 Shady Glen road – aside from having a suspect address – is a similarly sized home, but in turn key condition. It sold for $265,000 on 6/19/08. The subject is on a slightly larger lot, but the inferior condition, combined with the weak local economy, high gas prices and an oversupply of houses place the value of the subject property at $250,000. Further declines are likely in the near future.