One analyst is noting that even as mortgage costs hit record highs, there is still a healthy demand for housing, as evidenced by the unexpected rise in new single-family home sales in October.

John Lovallo, home builder and building products equity research analyst for UBS said in an interview, “I think what it tells us is that the underlying demand for housing is still very strong.”

He went on, “There is just very, very little existing home supply in the market, only about three months of supply versus the historical average of closer to six. To the extent that people are looking for homes, they’re more inclined to look at a new home and I think those factors are also in play.”

One factor driving the dynamic is that as mortgage rates rise, many homeowners who might have sold are opting to remain in their homes with their present low-rate mortgages, rather than move into new homes with mortgage rates of almost 7%. This reduction in supply is tightening the market, and supporting prices.

Lovallo said, “If you’re a homeowner, an existing homeowner, and you have a mortgage, chances are that it is below 5%, in many cases below 4%. I think it is forcing a lot of people to sort of stay put. The first-time buyers are still very active in the market, in our view, but in terms of existing home sales, you’re sort of locked in.”

Although this means the selection is limited, Lovallo said there are options, if homebuyers can incorporate some flexibility into their search.

He went on, “I think what is most important is that you have levers that you can pull. You can move a little further away from the city, and borrow money from mom and dad, you can buy a smaller footprint home.”

Lovallo says he expects the recent volatility in the home market to stabilize in the near future. Although the recent interest rate hikes by the Federal Reserve have driven mortgage rates to record highs, and drawn investors to the relatively safe 10-year Treasury bond, he said if the Treasury bond stabilizes next year, he expects mortgage rates could fall to 4%.

He continued, “If we use our economists’ forecast for the 10-year bond next year, which is 2.65%, that gets you a mortgage rate that’s in the mid-4’s. That it is a possibility that if we can just get some settling in rates, that affordability will be much improved.”