New home sales unexpectedly dropped last month as high mortgage rates continued to keep potential buyers on the sidelines.

Sales of new single-family homes came in at a seasonally adjusted annual pace of 617,000 in June, according to government data released Wednesday, marking a seven-month low. This represented a 7.4% drop from the same time last year and a decline of 0.6% from the revised May figure. Economists polled by Bloomberg were expecting new home sales to rise to a seasonally adjusted annual rate of 640,000 units.

Ongoing challenges, including high mortgage rates and elevated home prices, continue to constrain buyer activity. Mortgage rates have been stuck at or near 7% for the past year, which has consequently stifled buyer appetite for homes. Federal Reserve officials have signaled that they may start cutting rates this year, which would remove some pressure off mortgage rates.

Read more: When will housing prices drop?

Homebuilders, on the other hand, are hurrying to build houses to address the shortage in the resale market, which has been dampened by high borrowing costs and discouraged more sellers from listing their home. Last month, the supply of new homes to purchase increased 0.8% to 476,000 at the end of June. That’s an 11.2% bump from the same time a year ago.

Despite the drop in June sales, the government data showed the median sales price of a new home increased to $417,300 in June from $407,100 in May. A year ago, the median sales price of a new home was $417,600.

Builders have continued to offer incentives like mortgage rate buydowns to stay competitive. But they continue to grapple with rising building costs, interest rates, and inventory challenges.

Read more: How to buy down your mortgage interest rate

Earlier this month, new data showed that homebuilder sentiment fell to the lowest level since December as higher mortgage rates and high home prices gave builders pause. The lack of confidence has sparked builders to become more reluctant to start projects.

In June, builders broke ground on 1.35 million homes, a 3% increase from May’s figures but 4.4% below from a year ago, per government data, reinforcing the pullback from builders largely due to higher interest rates.

The slowdown in home building comes amid an increase in inventory in both the resale and new home market. Data from Redfin shows that nearly two-thirds of homes listed on the market in June had been listed for at least 30 days without going under contract.

Dani Romero is a reporter for Yahoo Finance. Follow her on X @daniromerotv.

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