Sales of new U.S. homes surged unexpectedly in February to their highest level since August, a Commerce Department (search) report showed on Wednesday, suggesting the housing market continues to benefit from low interest rates.

Commerce said sales of new homes rose a stronger-than-expected 5.8 percent to a seasonally adjusted 1.163 million annual pace in February, the fastest rate since August 2003's 1.190 million clip.

January new home purchases were revised lower, however, to a 1.099 million rate from the initially reported 1.106 million pace.

February's results came in above Wall Street expectations for sales at a 1.098 million rate and showed homebuyers were not deterred in February, even as builders slowed construction of homes. Homebuyers continued to be lured into the market by low mortgage interest rates.

Compared to February 2003, new home sales were up a hefty 24.4 percent.

Last week, Commerce said housing starts dipped 4.0 percent in February. Permits, seen as a gauge of future construction, were also off.

The dip was more surprising given the direction of interest rates lately. According to mortgage finance company Freddie Mac (search), the average interest rate on a conventional 30-year mortgage fell to 5.64 percent in February, the lowest since July 2003, from 5.74 percent in January.

Still, some analysts have bumped up their expectations for the housing market in 2004 as interest rates don't appear set to rise as quickly as previously thought.

Wednesday's report showed new home demand running ahead of supply in February.

The supply of new homes relative to demand dipped in February, and, at 3.8 months' worth, showed the leanest inventory of new homes on the market since September.

Sales were strongest in the West, where they raced ahead by 28.5 percent compared to January, and the Northeast, where they posted a 12.0 percent gain. Northeast sales, at a 103,000 annual rate, were at their highest level since January 1997.

Sales in the Midwest slid 10.6 percent while purchases in the South were off by 1.2 percent in February.