Steeper mortgage rates weren’t enough to smoke out demand for newly built homes, but the gains may not last.

Sales of new homes increased 12.3% to a seasonally adjusted rate of 759,000 units last month from the revised August rate of 676,000, according to the Census Bureau on Tuesday. That exceeded the Bloomberg consensus expectation of 680,000 units for September and the pace was 33.9% above last year's levels.

The uptick in sales activity, however, could be short-lived. As rates continue to rise during the slowest time of the year, that may mollify demand.

"When interest rates increase, like they did over the last month, sometimes you can get sales being accelerated. Buyers get concerned that rates are going to move even further higher, so they go ahead and make that purchase," Robert Dietz, chief economist at the National Association of Home Builders (NAHB), told Yahoo Finance prior to the release. "My expectation is we see a little bit of a bump up in new home sales in September and weakness in October."

Read more: Mortgage rates at 20-year high: Is 2023 a good time to buy a house?

Mortgage rates stayed steady for most of September, oscillating between 7.12% and 7.18% before turning higher in the last week, hitting a 23-year high of 7.31%, per Freddie Mac. Rates have only marched higher since then, staying above 7% for 10 straight weeks where they likely will remain for the foreseeable future, experts say.

The sharp increase in rates was a blow to existing home sales, which withered by 2% from August and were down 15.4% from the prior year, according to the National Association of Realtors (NAR), which also predicted total sales of previously owned homes to drop by 20% this year.

While a pullback in demand is partly to blame, a bigger factor is a lack of homes on the resale market, another consequence of high rates. Homeowners have been reluctant to sell because they would risk trading in their low rate on their existing mortgage for one that could be twice as high.

Read more: How to buy a house in 2023

That dearth of inventory has fueled interest in new homes all year. According to the NAHB, one third of single family homes on the market are currently new construction, when historically that figure has been about 12%.

"Buyers still in the market will seek out new construction, given the strikingly low levels of existing single family homes on the market," Dietz said. "Yes, housing affordability is at a multi-decade low, a lot of households have been priced out of the market, but with resale inventory down so low, new home sales are helping to fill in some of the void."

One way builders have been able to attract rate-conscious buyers — especially first timers — has been through incentives, Dietz said.

Read more: Types of mortgage loans: Buying a house in 2023

For instance, PulteGroup (PHM) is offering a permanent buydown on a buyer's mortgage rate as low as 5.75%. Some 80% to 85% of buyers in the third quarter chose incentives, PulteGroup CEO Ryan Marshall said this week on the company's latest earnings call.

"Given rates today on the open market would be over 8%, to be able to get a new home in a great location of the quality and design features that we have at 5.75%, I think is pretty powerful," Marshall said.

In September, 32% of builders reduced home prices, compared with 25% in August. According to the National Association of Home Builders, that’s the largest share of builders offering price cuts since December 2022, when that share hit 35%. The average price discount was 6%.

That showed up in the Census data, too. The median sales prices of newly sold homes in September was $418,000, down from August’s average of $430,300. The average sales price was $505,900, also below August’s average of $514,000.

But with mortgage rates fast approaching 8% this month and the weather turning cooler, buyers may step back and hibernate for a while before making a move.

"[The third quarter] displayed more typical seasonality than we have experienced in the three years since COVID as absorption pace eased as we moved through the quarter," Marshall said. "Demand has been a little choppier in the first few weeks of October with more volatility in the day-to-day sales numbers."

Gabriella is a personal finance and housing reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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