New home sales dropped in August from the month before, as mortgage rates topped 7% and rose to the highest levels in more than 20 years.

New construction home sales fell 8.7% in August to 675,000 from 739,000 in July, according to a joint report from the US Department of Housing and Urban Development and the Census Bureau. The number of sales increased 5.8% from last year.

The historically low supply of existing homes has been attracting determined buyers to new construction. However, affordability concerns remain.

Many homeowners with mortgage rates of 3% or 4% are reluctant to sell and buy another home at a much higher rate. Rates topped 7% in August and have remained there as the Federal Reserve continues to address inflation.

In August, the median price of a new construction home was $430,300, down slightly from $436,600 in July. In the fifth month in a row, prices have declined from a year ago by 2.3%.

As the tight housing market keeps prices high, affordability remains a challenge, and conditions won’t improve until interest rates or pricing decline,” said Kelly Mangold of RCLCO Real Estate Consulting.

Lisa Sturtevant, chief economist at Bright MLS, said builders have been adjusting to the shifting market by lowering prices and providing concessions, upgrades, and more attractive builder financing.

Builders have also shifted to smaller, less expensive homes as a result of the price drop.

Whenever possible, home builders are building smaller homes on smaller lots in response to the strong demand for starter homes and homes for first-time buyers. Home builders often find it challenging to build starter homes and still turn a profit.