An index of housing market conditions from the National Association of Home Builders and Wells Fargo slipped 1 point to 42, the lowest level this year. The median estimate in a Bloomberg of economists surveyed was 43. 

KEEP READING: Homebuilding supply costs surge at fastest pace in over a year

A gauge of sales expectations for the next six months was one of the few positives in an otherwise downbeat report Tuesday, with the forward-looking measure rising for the first time since March. 

The NAHB's gauges of prospective-buyer traffic and current sales both fell to fresh lows for the year.

The average rate on a 30-year fixed mortgage has been hovering around 7% over the last couple months. Prospective buyers, many of whom are waiting for cheaper borrowing costs, may soon find see some relief.

Mortgage rates tend to mirror rates on U.S. government debt, and the 10-year Treasury note yield is near the lowest level since March on prospects the Federal Reserve will soon lower interest rates.

Overall, 31% of builders cut prices in July, compared with the 29% who did so in the prior month, according to NAHB. The average price reduction was 6% for the 13th straight month, while the share of builders who reported using sales incentives remained at 61%. 

Demand for new homes has fallen off a bit with higher mortgage rates in recent months, but remains more resilient than in the resale market, Bloomberg Intelligence analyst Drew Reading said in a research note last week.

The share of available new homes that sold in June - or the industry's absorption rate - rose 1% over May, during a month when seasonal factors usually push sales down 6%. To be sure, the heavy use of sales incentives contributed to that, Reading said.

Builder sentiment in the Northeast showed the biggest drop among the four U.S. regions this month, with the measure falling by 15 points to 47, the lowest reading since October. Sentiment eased in both the Midwest and West, while staying flat in the South.