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Homebuilders were greeted with the report that new home sales have rebounded in August after having declined in July. The news was all the more encouraging as it sparked hopes that the rising mortgage rates may have slowed but not completely stopped the housing recovery.

Shares of many homebuilding stocks like KB Home (KBH - Analyst Report), Lennar Corporation (LEN - Analyst Report), Ryland Group, Inc (RYL - Snapshot Report), Hovnanian Enterprises Inc. (HOV - Snapshot Report), PulteGroup Inc. (PHM - Analyst Report) and D.R. Horton Inc. (DHI - Analyst Report) rose after market hours on hopes that the housing market will continue to recover.

The U.S. Census Bureau reported on Wednesday, Sep 25, that sales of new single-family houses increased 7.2% from July to a seasonally adjusted annual rate of 421,000 in August; a significant improvement from the 13.4% decline seen in July. The August figure is above the revised July rate of 390,000. Moreover, new home sales were up 12.6% from the year-ago period.

The report also stated that the median sales price of new houses sold in August was $254,600. Moreover, housing inventory stood at 175,000 homes at the end of August, representing a supply of 5.0 months at the current sales rate.

Since mid 2012, homebuilders have largely benefited from historically low interest rates, eventually leading to the sharp increase in home buying activity. With the recent improvement in economic conditions and the housing market in general, mortgage/interest rates have been edging upward to more normalized levels since May 2013. According to the Freddie Mac mortgage survey, the 30-year fixed mortgage rate has risen from 3.59% on May 23 to 4.50% as of Sep 19. As a result we found the share prices of most housing stocks hurtling down after having peaked in May.

This has raised concerns among some analysts. High interest rates dilute the demand for new homes, as mortgage loans become expensive. Subsequently, this lowers a buyer’s purchasing power. This in turn would lower revenues and profits of homebuilders.

However, another group of analysts believe that interest rates are still below historical levels despite the recent hike and housing is still very much affordable. Home prices have also started rising with market demand gaining momentum but supply remaining limited (both of existing and new homes). In fact, this group of analysts believes that rising home prices and thinning home inventories have created a sense of urgency among homebuyers to buy a house before prices or mortgage rates shoot up further.

Earlier this month, the Federal Reserve unexpectedly announced that it was not starting to taper its current $85-billion-a-month bond buying program. Fed Chairman Ben Bernanke said that they wanted to see more evidence of economic growth before reducing the bond buying. Interest rates have fallen slightly after Fed’s ‘no taper’ decision.

This week, Lennar and KB Home reported better-than-expected third quarter earnings despite the rising interest rates. Both the homebuilders stated that the sudden spike in interest/mortgage rates had their slowed order pace and traffic. However, they believed that the moderating sales pace was a temporary effect and demand should go up once consumers adjust to both higher rates and pricing.

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