New home sales dropped in February from upwardly revised December and January numbers. According to RBS Greenwich Capital, to have upward revisions to November through January is a very encouraging sign. This is because revisions to these data tend to be considerable and very market-directional. In other words, these are generally upward when the trend is up and vice versa. RBS said that significant downward revisions have been the norm for these data for nearly two years now. While February's level of new home sales is officially the lowest in 13 years, extending the downtrend, the February print of 590,000 is actually pretty much flat versus the initial January reading of 588,000. Not unlike existing home sales, RBS said it is too early to get overly excited, but analysts are encouraged by the February sales figures that our call of a bottoming out of home sales by mid-year will come to fruition, although at lower clearing prices than what was expected six months ago. Combined existing and new home sales rose by 2.3% in February, which is the first significant gain in a year, RBS said. "It's a start, but we will need to see more than one monthly blip to really gain any confidence," analysts wrote. In a related report,Merrill Lynch analysts said that even with the current jump in mortgage purchase applications, the numbers are still only up about 0.4% from the February levels. The figures are usually driven upwards by borrowers filing multiple applications. Many of these application are probably going to be turned down as tight lending standards are limiting credit availability. Indeed, since 2006, there is a clear disconnect between mortgage application volumes and new home sales, Merrill analysts said. This is a relationship that was very tight in the last 15 years, they noted. The March National Association of Homebuilders report indicated that neither buyer traffic nor present single family home sales improved from February levels. This is why Merrill does not see any compelling evidence of a firm March print for new home sales. Separately, Merrill Lynch analysts also stated that median new home prices jumped 8.2% month over month, although this was probably the result of more sales of higher value homes, skewing the median price higher. However, Merrill analysts said that the better home sales activity, failed to put a dent in inventory levels as months' supply stayed at 9.8 months, which is the highest since October 1981. Also, the number of months it takes builders to unwind finished product was running at 7.2 months, which is 38% above February of last year.

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