The man detained is also understood to be from Kilkenny and was known to the deceased.
Gardai cordoned off the scene pending a detailed examination by technical experts.
The two-storey semi-detached house is at the rear of the small cul-de-sac estate.
It is within sight of Tramore Promenade and a popular local holiday caravan park.
The Seafield estate is primarily used for seasonal summer rentals but a number of people do live in the estate year-round.
The property on one side of the house where the fatal stabbing occurred is empty.
The other house is occupied but the residents are understood to have been at work when the incident occurred next door.
One of the door panels of the house where Mr O'Dwyer died was missing having apparently been kicked or forced in.
A neighbour, who asked to be unnamed, said he believed the door panel had been kicked in as part of the row in which the young man died.
"At the time I just thought it was people having fun as part of the party.
"I was watching a DVD last night so I just turned the sound up and didn't bother going out to check what was going on," he told the Herald.
"The next thing I noticed flashing blue lights through the window and realised that there were gardai and paramedics outside.
"I didn't go up there and I didn't know the chap that died."
The body of the young man was removed to Waterford Regional Hospital, Ardkeen where a full post mortem examination is scheduled to take place this evening.
The arrested man is being questioned at Tramore Garda Station under Section 4 of the Criminal Justice Act and can be held for an initial period of 24 hours.