It was Christmas in July for the housing market. Mortgage rates fell to near-historic lows following an interest rate reduction by the Federal Reserve.

Existing home prices continued to level off. Homebuilders made some headway toward replenishing inventories. As the purchase of a home became somewhat more affordable, buyer sentiment rose and so did sales.

Fannie Mae reported that its Home Purchase Sentiment Index hit a new survey high in July, up 2.2 points from the previous month, due to strong consumer confidence and the expectation that lower mortgage rates would make a home purchase more affordable.

The proportion of respondents who said they were not concerned about losing their jobs soared 8 points, and those who said now was a good time to buy a house rose 3 points. Slightly more respondents (1%) said they believed home prices would not continue to go up in the coming months and that mortgage rates likely would continue to go down.

As mortgage rates dropped below 4%, those sentiments were enough to drive more buyers into the market. According to the Mortgage Bankers Association (MBA), mortgage applications for new home purchases jumped 11% compared to June and were up a whopping 31.2% from July 2018. By its calculations, the MBA estimates new home sales grew by 8.6% versus June.

Existing home sales also rebounded in July, up 2.5% over June, helping to bring year-over-year sales into the black (now up 0.6%). The median price of homes sold was $280,800, about $5,000 less than in June. Single-family sales increased 2.8% month-over-month and are now up 1% for the year.

Muddying the waters somewhat was the U.S. Census Bureau announcement that new home sales in July fell 12.8% from the previous month. However, at the same time the Bureau revised figures for May and June upward, with June posting a 12-year high, thus offsetting July’s apparent decline. Year-over-year sales in July actually were up 4.3%. The average and median prices of new homes increased slightly from June, by roughly $20,000 and $2,000, respectively.

New home construction (in units) revived in July as well, though the dollar value dropped as builders continue to face pressures to make homes more affordable. Single-family new home starts grew month-over-month by 1.3 %, permits by 1.8 %, and completions by 4.3 %.

The National Association of Home Builders (NAHB) said builder confidence remains high, with builders reporting an increase in sales and prospective buyer traffic. They were a bit more cautious about their expectations for sales in the coming six months.

Lower borrowing costs appear to have been the accelerator in July, but overall affordability continues to act as the brake pedal on the market. National Association of Realtors chief economist Lawrence Yan noted that the supply of affordable housing, where demand is greatest, is “severely low.”

Robert Dietz, NAHB chief economist, observed “demand is good and growing at lower price points and for smaller homes” but “affordability headwinds remain a challenge” for builders. If home price increases continue to slow, that could benefit both buyers and sellers. If dropping mortgage rates cause prices to rise, we’ll likely see another cycle of a month of gains followed by a month of losses.