Buyers Flock to New Homes

According to Freddie Mac, the average rate on a 30-year mortgage was 6.07% in October, up from 5.77% in September. At the end of last week, the rate had crept up to 6.28%, which still is somewhat low historically. And with many expecting the Fed to raise the fed funds rate an additional 25 basis points at each of its next two meetings, mortgage rates are expected to climb higher, which could slow down housing sales next year.

Phillip Neuhart, an economic analyst with Wachovia, expects housing sales to remain strong through the end of the year because of the relatively low mortgage rates. But he expects housing to eventually decelerate because of higher mortgage rates.

But any expected price declines could be thrown out the window based on what the Fed does with its interest rate hike campaign. "I think the key thing to watch, the only thing that matters, is whether the Fed backs up its interest rate hikes," says Jim Poyner, an analyst with Palladian Research who covers homebuilder stocks.

As long as mortgage rates continue to climb, Poyner expects year-over-year pricing comparisons to turn negative within the next six months, which he says will result in eroding gross margins for the homebuilders

With inventories of homes continuing to ramp up across the country, builders are now in a precarious situation, Poyner says.

"Now is where things get a little sticky for homebuilding companies because they're going to start making decisions now about just how patient they want to be in moving this inventory -- particularly as they see the inventory of finished houses increase," he says.

The sales data helped homebuilder stocks rebound from Monday's news of lower-than-expected existing-home sales.

The Philadelphia Stock Exchange Housing Sector Index was up 1.3% in morning trading, with Lennar(LEN Quote) rising 1.2% to $58.36, Pulte Homes (PHM Quote) gaining 1.5% to $42.17, and Centex (CTX Quote) rising 1.3% to $73.62.