The U.S. Census Bureau released its monthly update on new residential home sales on February 26, reporting that new single-family home sales increased 18.6% from the year-ago period in January, and increased 8% from December, on a seasonally adjusted level. 

At a seasonally adjusted rate of 764,000 units, January represents the best new-home-sales month since 2007, coming in well-above expectations by most in the housing industry. 

Carpenter building a house.

Image source: Getty Images.

Upward revision for December also a big boost

The January estimate wasn't the only good news. The Census Bureau also revised its December data, increasing its initial estimate of 694,000 new homes sold to 708,000 as more information came in. For context, these numbers are revised regularly as more data becomes available. 

Supply remains weak; demand remains high; interest rates near decade-lows

Median prices increased 14% in January, largely a product of where sales were strongest. The northeast and west -- home to some of the most-expensive housing markets in the country -- reported sales increased 47% and 49% from 2019 levels in the month. 

There also continues to be pricing pressure due to limited inventory. There were an estimated 324,000 new homes available for sale at the end of January, or about 5.1 month's supply at the recent sales pace. That works out to a 27% drop in supply from last year, as homebuilders struggle to keep up with strong demand, especially for smaller homes that are more affordable for first-time buyers, and appealing to older homeowners looking to downsize. 

In addition to strong demand, interest rates continue to swing lower, helping with affordability. 

Two companies that are looking to profit from this strong demand are Meritage Homes (NYSE:MTH) and LGI Homes (NASDAQ:LGIH), which both focus primarily on building and selling entry-level homes and communities. Both Meritage and LGI Homes reported double-digit growth in the number of homes they sold in 2019, and expect to grow 2020 sales by double-digits from last year's levels.