"As long as we have increased inventory, I think the housing market can turn for the better in terms of sales," NAR Chief Economist Lawrence Yun said.
Supply has also been constrained by rising building material costs as well as land and labor shortages while rising mortgage rates are expected to slow demand.
The Federal Reserve is expected to raise borrowing costs by a quarter percentage point next Wednesday following its latest interest-rate policy meeting. It would be the third such increase this year.
Economists polled by Reuters had forecast existing home sales increasing 0.3 percent. Existing home sales make up about 90 percent of U.S. home sales.
Existing home sales fell 1.5 percent from a year ago. Across the nation's four regions, sales jumped 7.6 percent in the Northeast and there was a rise of 2.4 percent in the Midwest. Sales fell 5.9 percent in the West and 0.4 percent in the South.
There were 1.92 million homes on the market in August, an increase of 2.7 percent from one year ago. It was the first inventory increase in three years on a year-on-year basis.
On Wednesday, data showed housing starts rose 9.2 percent in August as groundbreaking on multifamily units soared, but permits were off 5.7 percent, the biggest decline since February 2017.
At August's sales pace, it would take 4.3 months to clear the current inventory, up from 4.1 months a year ago. A supply of six to seven months is viewed as a healthy balance between supply and demand.
The median house price increased 4.6 percent from one year ago to $264,800 in August. It was the fourth consecutive month that prices had risen less than 5 percent on a yearly basis, NAR noted.