The Econoday consensus for existing home sales was 5.65 million units. Instead, sales took a dive to 5.35 million units. This was the second consecutive monthly decline.

An uptick in supply and lower prices failed to boost existing home sales in January, which unexpectedly fell 3.2 percent versus the marginally downward revised December level to an annualized rate of 5.380 million, well below the consensus estimate of 5.650 million and the lowest rate for January since 1999. Year-on-year, home resales were down 4.8 percent, the largest decline since August 2014.

Though lack of supply continued to hamper sales volumes, supply in January's market increased 4.1 percent from December's level to 1.520 million homes. While this is down 9.5 percent from January last year, inventory rose from December's 3.2 months, a 19-year low, to 3.4 months. Still, lack of choice remains a serious problem for the resale market.

But prices softened considerably in January, which won't be drawing new homes onto the market. The median selling price fell by a sharp 2.4 percent to $240,500 for a year-on-year increase of 5.8 percent.