US new home sales to correct in March, but remain on a strong trend

US new home sales surged unexpectedly by 7.8% mom in February despite severe temperatures in many parts of the country. 

Taking a longer-term look at housing data, the recent sharp increases in household formation suggest that housing may be on the verge of surprising on the upside. Net household formation increased significantly last fall, from a post-2008 average of 550k to nearly 2,000k annualized. 

Looking at demographics, trend household formation is estimated at about 1,300k per year, and recent numbers suggest that this pentup demand may finally be materializing. 

Economists are constructive on new home activity over the next 12 months, "we view this one-month increase as excessive and expect some moderation in March. Our forecast for a 6% mom pullback would put the March level at 507k, above the January level of 500k and well above last year's average of 439k", says Societe Generale.

A recent pickup in mortgage applications for purchases is another positive sign. As a result, new home sales are expected to remain on a positive trend this year despite the likely pullback in March.