New home sales take off; market remains grounded overall 

While existing home sales remained in the doldrums last month, the market for newly constructed houses is one of the few bright spots this fall.

Sales of new homes came in at a seasonally adjusted annual rate of 738,000 in September, according to the U.S. Census Bureau. That's up 4.1% from August and an increase of 6.3% compared to a year ago. Sales in the Midwest were especially strong, rising 19.2% on a year-to-date basis, noted Jing Fu, director of forecasting at the National Association of Home Builders. Existing home sales, on the other hand, hit a 14-year low last month.

One reason for the diverging trends? Home builders have more buyer incentives in their toolkit, including some flexibility in financing options. But timing may be a bigger factor, said Lisa Sturtevant, chief economist for Bright MLS. New home sales are recorded when a contract is put on a home, Sturtevant noted, while existing home sales are reported at closing. 

That could have made a big difference in the data, because 30-year mortgage rates were ticking down to around 6% in September, which may have prompted more new home contracts last month.

Mortgage rates up, but declines still expected

Meanwhile, near-6% rates now seem like a distant memory, as mortgage rates have continued to rise in the weeks following the Federal Reserve's September rate cut. The 30-year fixed-rate mortgage averaged 6.54% this week, according to Freddie Mac. It's the fourth straight increase in the weekly survey, but discouraged buyers should remember that a year ago, rates averaged 7.79%.

Mortgage News Daily, which uses different criteria to measure rates, shows the average mortgage rate leveling off — but closer to 7% — with an estimated daily rate of 6.91% on Oct. 24.

Despite the upward trend, mortgage rates are still expected to decline before the end of the year, although predictions have proven tricky.

"Stronger-than expected economic data, including robust employment data and stubborn core inflation, have prevented downward progress in mortgage rates over the last month," said Hannah Jones, senior economic research analyst at Realtor.com. "The antidote to the recent climb will be if upcoming economic data falls more in line with expectations."

Looking ahead, Sturtevant expects mortgage rates to be bumpy in the short term but trend lower in the coming months.

With rates rising, applications for mortgages have continued to slow, according to the Mortgage Bankers Association. The latest numbers show application activity at its lowest level since July, with both purchase and refinance applications posting weekly declines, said Joel Kan, MBA's deputy chief economist. Higher rates are expected to dampen new home sales as well, said Fu.

Demand is still lurking

Existing home sales may be sluggish, but buyers are still showing interest — though possibly waiting for conditions to improve before making a purchase. Redfin's latest demand index — which looks at home tours and other homebuying services — hit its highest level since May and is up 3% year-over-year.

Inventory continues to rise, but it's expected to slow as the holiday season approaches. Redfin's report indicates active listings are up 15.2% compared to a year ago, but looking at the past four weeks, the increase was the smallest since March.