WASHINGTON (MarketWatch) -- Sales of new homes dropped 8.3% in August to a seasonally adjusted annual rate of 795,000, the slowest sales pace since June 2000, the Commerce Department estimated Thursday.

Sales are now down 21.2% in the past year, with no sign of a bottom in the crippled housing market. Read the full government report.

"This is just hideous," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics.

"This is more evidence that it's going to be a long and -- for a lot of people -- a painful process," said Mike Schenk, economist for the Credit Union National Association. "The soft housing market will be with us for a long time, at least 18 months."

August's sales pace was weaker than the 825,000 expected by economists surveyed by MarketWatch. See Economic Calendar. In addition, sales in May, June and July were revised lower.

The sales figures do not account for canceled sales contracts.

The median sales price fell 7.5% to $225,700 compared with a year earlier, the largest year-over-year decline in 37 years. The median price can be affected by the mix of homes sold between and within regions, and the price does not include nonmonetary incentives, such as upgrades, free vacations and new cars.

The inventory of unsold homes fell by 1.5% to 529,000, the fifth straight decline as builders struggle to bring their inventories down. The inventory represents an 8.2-month supply at the August sales pace, the highest since March.

The number of completed homes that have not yet sold rose 1.1% to 180,000, the first increase since May. Completed homes now represent 34% of all homes on the market, the highest percentage in this business cycle. "This could put further pressure on builders and encourage incentives and price cuts," wrote Adam York, an economist for Wachovia.

On Thursday, KB Home KBH, -2.45% reported a quarterly loss and predicted "seriously challenging market conditions" would last into next year. KB said its cancellation rate rose to 50%. See full story.

On Tuesday, the National Association of Realtors said sales of existing homes fell to a five-year low in August, while inventories jumped to an 18-year high. See full story.

Total home sales -- existing and new -- fell 5% in August to a seasonally adjusted annual rate of 6.30 million, the lowest in six years.

New-home sales are reported when a contract is signed, not at the closing of the sale. Home builders have reported a large increase in cancellations in recent months. Cancellations are not reflected in the government data, so the reported sales are likely overstated.

The data cover activity through the end of August, after the severe credit squeeze forced additional mortgage lenders out of business and made nonconforming mortgages, including jumbo mortgages, harder to obtain. Most buyers of new homes obtain a mortgage commitment before signing a contract. But many buyers have found that their loan has fallen through between the commitment and the closing.

"The bad news is that the August data only partially reflect tighter mortgage credit conditions," wrote Richard Moody, chief economist for Mission Residential.

The carnage in the mortgage industry in August could affect homes sold months ago, but only closing now as the home is completed. Those lost sales would still be counted in the government data.

"Sales have further to fall," Shepherdson said. "People don't like borrowing to buy depreciating assets, and lenders don't like to lend on them either."

The government cautions that its housing data are subject to large sampling and other statistical errors. Large revisions are common. The standard error of 12.4% is so high, in fact, that the government cannot be sure in most months whether sales rose or fell.

It can take up to five months for a trend in sales to emerge. New-home sales have averaged 853,000 per month over the past five months, compared with 860,000 in the five months ending in July. That's the lowest five-month average in seven years.

Home builders have piled on incentives, including offering free vacations and new cars, to sell homes and reduce inventories. Such incentives are not subtracted from the sales price reported to the government.

Sales rose 42.3% in the Northeast to 74,000 annualized and rose 20.5% in the Midwest to 135,000. Sales fell 20.8% in the West to 179,000 and fell 14.7% in the South to 407,000, the lowest in five years.

In other reports, the Labor Department said first-time applications for jobless benefits fell by 15,000 to 298,000, the lowest since May.

The Commerce Department said the U.S. economy grew at a 3.8% annual rate in the second quarter, a slight downward revision to the 4% reported a month ago.