The latest fall almost reversed the small gain seen at the end of 2010 and leaves the Index just six points above its all time low.
Consumers expect the housing market to remain sluggish over the coming months. They expect the value of their homes to decrease by 1.1% over the next six months, similar to the decrease of 0.9% they expected in December.
The Expectations and Spending indices were the key drivers, with the latter recording the largest monthly fall on record. Moreover, at 70 points this measure is now at its lowest level since November 2008.
Confidence in the present situation remained subdued in January, although this is nothing new - the Index has hovered around 30 for over two years now.
Commenting, Robert Gardner, Nationwide's chief economist, said: "Household confidence remained in the doldrums in January, with the main index falling towards the all time lows recorded during the recession. This follows a small bounce in December and confirms that consumers are still feeling very subdued about their own personal circumstances.
"The fact that the index fell during the month is not surprising, when we consider the influences that will have impacted on consumer sentiment during the survey field dates.
"Consumer perceptions are likely to have been dented by the rise in VAT and the upward pressure on inflation more generally, with rising prices for petrol and other essentials likely to have been recorded during the month. This will have put further pressure on household budgets in January.
"Such a squeeze on purchasing power could also explain the record fall in the Spending Index, which slumped to a level last seen during the depths of the recession.
"Consumers showed greater pessimism towards their current and future economic situation, although the latter saw the greater negative shift in sentiment. Expectations towards the future economic situation have played a prominent role in pushing overall confidence down in the past 12 months. Less than one in five consumers believe things will improve over the next six months.
"While this highlights the ongoing uncertainty about the economic outlook, it perhaps also shows an understanding by households that the UK's economic recovery is likely to remain choppy.
"In the quarters ahead, we expect business investment and trade to lead the recovery and this will gradually feed through to households through stronger employment and income growth.
“Nonetheless, it is likely to take time for the feel good factor to filter through and it may be some months before we see significant positive movements within the Consumer Confidence Index."
