A gauge of US homebuilder confidence fell to its lowest level in over three and a half years in December, as concerns over housing affordability continue to weigh on the sector’s outlook.

The National Association of Homebuilders’ housing market index unexpectedly dropped to 56 this month. That’s down from the 60 recorded in the prior month and is the weakest reading since May 2015. Analysts had forecast the gauge to remain unchanged.

“We are hearing from builders that consumer demand exists, but that customers are hesitating to make a purchase because of rising home costs,” said NAHB chairman Randy Noel.

Demand for housing has been supported by strength in the US labour market and rising wages alongside rising household formations as millennials enter the market.

However, a tight supply of housing stock has driven up home prices and affordability concerns have been exacerbated in recent months by a run up in mortgage rates and rising material costs.

While both of these have pulled back in recent weeks, NAHB’s chief economist Robert Dietz said affordability remains an ongoing concern.

“The fact that builder confidence dropped significantly in areas of the country with high home prices shows how the growing housing affordability crisis is hurting the market,” he said. “This housing slowdown is an early indicator of economic softening, and it is important that builders manage supply-side costs to keep home prices competitive for buyers at different price points.”

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