Sales of previously owned homes rose in September to the third highest level on record as low mortgage rates beckoned buyers.

The National Association of Realtors (search) reported Monday that after two straight months of declines, sales rose 3.1 percent in September from the previous month to a seasonally adjusted annual rate of 6.75 million units, the third-highest showing ever.

The figures were better than analysts were expecting. They were forecasting sales of previously owned homes to clock in at around a 6.54 million pace for September.

"This isn't the little engine that could. It's the big machine that still can," said Joel Naroff, president of Naroff Economic Advisors (search).

Low mortgage rates have bolstered housing activity, and the housing market has been a bright spot for the economy -- not only during the 2001 recession but also in its subsequent recovery. Economists expect home sales to set new record highs for all of 2004.

The average monthly rate on a 30-year mortgage in September was 5.75 percent. That was down from 5.87 percent in August and 6.15 percent in September a year ago.

"The good news is that interest rates have been fairly stable over the last month, hovering near generational lows and that is increasing the purchasing power of buyers trying to get into the housing market," said David Lereah, the association's chief economist.

Last week rates on 30-year mortgages averaged 5.69 percent, the lowest level seen in six months.

The median price of a previously owned home -- half sell for more and half sell for less -- was $186,600 in September, up 8.6 percent from the same month last year.

Federal Reserve (search) Chairman Alan Greenspan (search), in a speech last week, said that soaring home prices do not appear to pose a major threat to the U.S. economy.

Sales of existing homes were up in all regions of the country, except for the South, where they dipped. Lereah blamed that decline on the impact of hurricanes, which recently tore though Florida and other states in the region.

By region, sales in the West increased by 7.8 percent in September from August to an annual rate of 1.93 million units. In the Northeast, sales rose 4.1 percent to a pace of 760,000, and in the Midwest sales went up by 3.7 percent to a rate of 1.39 million homes. In the South, however, sales declined by 0.7 percent to a rate of 2.67 million.

Tom Kunz, president of Century 21 Real Estate Corp., predicted that activity in the South will bounce back and that the national market for home sales will remain vibrant in the months ahead.

"Mortgage rates are just unbelievably low," he said. "The American dream is still alive and well."