New Home Sales soared by 26.9% in March to a seasonally adjusted annual rate of 411,000. Relative to a year ago, sales were up 23.8%.

In addition, the numbers for February were revised up to an annual rate of 324,000 rather than the original reported figure of 30.8%. So relative to where we thought sales were they climbed 33.4%.

This is by far the most significant economic number of the week. Inventories of homes for sale fell by 2.1% to 228,000. That drop, combined with the faster sales pace, lowered the months of supply metric down to 6.7 months from 8.6 months in February. Over the last year, inventories are down 27.2%, and a year ago months of supply stood at 11.3.

While some of the rise in sales may be due to the home buyer tax credit that ends April 30th, it is still good news. That effect was not as pronounced in the existing home sales numbers that were released yesterday because of a difference in the timing of when sales are recorded. For new homes, it is when the contract is signed, and for existing homes it is at the closing. People have until the end of June to close on the house to get the credit, but it must be under contract by the end of this month.

Still, this was well known to the economists who were making the projections, so the fact that the sales numbers far exceeded the consensus forecast of a 330,000 annual rate is highly significant.

Increases by Region

Regionally, all four areas of the country saw increases for both the month and on a year over year basis. For the month, the biggest increase came from the biggest area of the country when it comes to the housing data — the South, where sales rose 43.5% from February. Some of that could have been from sales being depressed in February due to the snowstorms which hit Dixie particularly hard, but still, a 43.5% increase on the month is impressive.

Sales in the South were 18.5% higher than a year ago. In March, the South was responsible for 56.2% of all new home sales, up from 49.7% in February. The rise in the biggest area of the country was followed by a 35.7% increase in the Northeast, the smallest area of the country for new home sales.

On a year-over-year basis, sales in the Northeast doubled! The Northeast was also ht by the snowstorms, but folks in Boston know how to deal with snow better than people in Atlanta do. While snowstorms could have depressed sales in February, making for a bigger bounce on a month-to-month basis, they do not explain the huge year-over-year increase. However, even with the increase, the Northeast only accounted for 9.2% of all new home sales, up from 8.6% in February and just 5.7% a year ago.

Sales gains in the other two regions were healthy, but not spectacular for the month, with a 4.3% rise in the Midwest and a 5.7% rise in the West. Year-over-year, sales are up 11.4% in the Midwest and up a very strong 25.7% in the West.

Lower Prices a Factor

The big jump in sales did come at the cost of somewhat lower prices, with the median price of a new home falling to $205,100 from $221,600 in February and $214,000 a year ago. The average price fell to $259,000 from $290,900 in February, but was up slightly from the year-ago level of $258,600. However, some of that could be from the regional effect, as house prices in the South tend to be well below the national average, offset by houses in the Northeast, which is the most expensive part of the country for houses.

On an incremental basis, there were 7x as many additional houses sold in Dixie than in the Northeast. By price category, sales of starter homes (under $200,000) rose 54.5% on the month, and are up 21.4% year over year. Sales of McMansions (over $500,000) were unchanged (this is based on the non-seasonally adjusted actual sales, and are only in thousands, so there is a lot of potential for rounding errors in this data) and were down 33.3% from a year ago. Sales of Move up homes rose 58.3% on the month and are up 26.7%.

It is hard to overstate just how important new home sales are. Traditionally, residential investment is the key locomotive that pulls the U.S. economy out of recessions (and also drags us into them). This can clearly be seen in the graph below (from http://www.calculatedriskblog.com/).

Note how coming out of every recession (or even during the worst of it) new home sales start to rise sharply. This tends to set off a very powerful virtuous cycle, since each new home built involves a very large amount of economic activity that stretches throughout the economy. It is not just good news for the homebuilders like D.R. Horton (DHI) but also to suppliers like Fortune Brands (FO), lumber companies like Weyerhaeuser (WY) to truckers who move the materials and the construction workers (very hard hit in this downturn) who will now have jobs.

They will, in turn, be able to once again go shopping at Wal-Mart (WMT), and the sub-contractors will be doing a lot more shopping at Home Depot (HD). This is a VERY positive report, even if it is goosed a bit by the end of the tax credit.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

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