Pending home sales dropped 3.2% in July after gaining in June according to the National Association of Realtors report released Tuesday. The Pending Home Sales Index fell to 86.5, after gaining 5.8% in June and 6.7% below July last year's reading of 92.8.

The index is a forward-looking indicator of housing sales, based on contracts signed during the month. The tighter lending policies have contributed to the decline in sales as it made harder for buyers to obtain loans.

"Overly stringent lending criteria imposed by Fannie Mae and Freddie Mac in the past month no doubt held back contract signings," said NAR chief economist Lawrence Yun.

The best performing region in July was the Midwest where sales contracts increase 2.8%. The index dropped in the Northeast by 7.5% and in the West by 10.6%, while the South region remained.

Some areas have seen increase ins sales and could further increase in the coming months.

Sales have been flat despite the fact that home prices are way down. The most recent S&P/Case-Shriller report found that home prices fell 15.4% nationally during the 12 months ended June 30.