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) - The number of contracts signed to purchase existing homes fell for the fourth straight month in September, as declining affordability cooled demand and the gridlock in Washington added further uncertainty to the market.

The National Association of Realtors' Pending Home Sales Index fell 5.6% to 101.6 in September from a downwardly revised 107.6.

The index is also 1.2% from year-ago levels, the first year-over-year drop in 29 months. The index is at its lowest level since December 2012.

Housing demand has shown signs of cooling in the past few months as higher mortgage rates and higher home prices have cut into affordability.

"Declining housing affordability conditions are likely responsible for the bulk of reduced contract activity," NAR economist Lawrence Yun said. "In addition, government and contract workers were on the sidelines with growing insecurity over lawmakers' inability to agree on a budget. A broader hit on consumer confidence from general uncertainty also curbs major expenditures such as home purchases."

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Yun says the index suggests home sales will be lower in the fourth quarter and flat in 2014. Still, inventory shortages will continue to push home prices higher.

The NAR predicts existing home sales will finish the year at more than 5.1 million units, up 10% from 2013 and expects these levels to persist in 2014. The national median existing-home prices is expected to rise 11 to 11.5% for all of 2013 but should moderate to a 5% to a 6% gain in 2014.

-- Written by Shanthi Bharatwaj in New York.

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