The National Association of Realtors reports that existing-home sales slid 0.4 percent in January to 4.89 million units from a revised level of 4.91 million in December 2007. Sales are now 23.4 percent below the industry's 6.44 million-unit pace in January 2007.

Lawrence Yun, NAR chief economist, said many potential home buyers are waiting on the sidelines. He said subprime loans and other risky mortgage products have virtually disappeared from the market, which over the past five months has been reflected in soft, but fairly stable home sales.

"As the increased limits for FHA and conventional loans are implemented, more buyers will have access to safer FHA loans and lower interest rate loans in high-cost areas," Yun said, adding that this could lead to steadily higher home sales later this year.

According to Patrick Newport, U.S. economist at research group Global Insight, plunging condo/co-op sales in three of the four major regions accounted for January's drop in sales. Single-family home sales increased 0.5 percent, but condo/co-op sales dropped 6.5 percent.

Newport said condos and co-ops are overpriced, especially compared to single-family homes. He said the average condo/co-op unit sold for 90 percent more in 2006 than in 2000, while the single-family home average increased 47 percent.

During the next few months, Newport expects that the housing industry's huge inventory overhang will force prices down. In cities with falling home prices, home buyers must now weigh whether to buy an asset that is depreciating or rent instead.

"We think that a growing share will choose to rent and wait things out," said Newport. "Over time, shifts in demand will cause rents to rise, house prices to drop, and home sales to turn around, but we think the turnaround is still months away," he concluded.