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Homebuilder sentiment hit its lowest level since December in August as rising interest rates and record home prices continued to dampen buyers’ appetite for new homes.

National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) The manufacturing purchasing managers’ index fell to 39 in August, down two points from July’s revised 41. Economists polled by Bloomberg had expected a reading of 43.

Any number below 50 indicates that more builders view conditions as bad rather than good.

“Challenging housing affordability conditions remain the top concern for potential homebuyers in the current HPI reading, as current sales and traffic readings showed weakness,” said Carl Harris, chairman of the National Association of Home Builders, a custom home builder from Wichita, Kansas, in a statement.

The drop in builder confidence comes as mortgage rates have fallen to their lowest levels in more than a year. The average rate on a 30-year fixed mortgage fell to 6.47% from 6.73% last week, Freddie Mac Report Last Thursday, and new data is due out this afternoon.

However, the National Association of Home Builders reported that about three-quarters of the responses to its August survey were collected during the first week of the month when mortgage rates were hovering above 6.7%.

As a result, builders cut home prices to boost sales in August, with 33% of builders reporting lower home prices, the highest share so far this year and up from 31% in July. Meanwhile, use of sales incentives rose to 64% in August from a reading of 61% in July, the highest since April 2019.

“With current inflation data pointing to a Fed rate cut and mortgage rates falling significantly in the second week of August, buyer interest and builder sentiment are expected to improve in the coming months,” Robert Dietz, chief economist at the National Association of Home Builders, wrote in a press release.