Updated from 11:21 a.m. EDT

Existing-home sales fell 12.6% in August from a year ago, as inventories rose to the highest level since 1993.

Median prices, however, also dropped. The lower prices, coupled with declining mortgage rates, could be the remedy needed to burn off some of the excess supply.

The National Association of Realtors said Monday that sales of existing homes came in at a seasonally adjusted annual rate of 6.3 million units in August, down from 7.21 million in August 2005 and 6.33 million in July. Economists expected a sales rate of 6.25 million homes.

Inventories rose 1.5% from July to August to total 3.92 million homes available for sale. At the current sales pace, that represents 7.5 months of supply -- the highest level since April 1993.

"Inventories need to be worked down. The inventories are still increasing, albeit at a much slower pace than they were," says Jack Lake, an analyst with Victory Capital Management, which owns several homebuilder stocks.

The 7.3 months of supply for single-family homes in August was a 0.1-month increase from July. During the previous two months, the sequential increases were 0.5 months and 0.4 months, respectively.

Condo inventories continue to skyrocket, however, with the months supply metric jumping from 8 in July to 8.6 in August.

The large amount of housing supply continues to be a problem for homebuilders, which are being forced to raise incentives and cut prices to sell new homes. Nonetheless, homebuilder shares moved higher Monday.

KB Home

(KBH) - Get Report

advanced 3.1% to 45.62,

Toll Brothers

(TOL) - Get Report

rose 2.4% to $28.47, and

Centex

(CTX)

jumped 4.3% to $53.58.

Lennar

(LEN) - Get Report

, which releases earnings Tuesday, rose 2.3% to $46.88.

The national median existing-home price for all housing types was $225,000 in August, down 1.7% from a year earlier. The median is a typical market price where half of the homes sold for more and half sold for less.

"This is the price correction we've been expecting -- with sales stabilizing, we should go back to positive price growth early next year," said David Lereach, NAR's chief economist, in a statement.

NAR President Thomas M. Stevens said in the news release that sellers need to price to current market conditions if they want to sell within a reasonable amount of time. "In some areas home sellers are not making sufficient adjustments in their listing price, so their homes are staying on the market and contributing to the build up in inventory," he said.

"Sellers are starting to become more realistic, and that could provide some lift to home sales because there is a healthy underlying demand from household growth and job creation," said Stevens, who also is vice president with NRT, the country's largest brokerage firm and a unit of

Realogy

(H) - Get Report

.

Meanwhile, interest rates continue to drop. According to

Freddie Mac

(FRE)

, the national average commitment rate for a 30-year, conventional fixed-rate mortgage was 6.52% in August, down from 6.76% in July. The rate was 5.82% in August 2005.

Last week, the 30-year fixed dropped to 6.4%.