(Reuters) -A gauge of U.S. homebuilder sentiment fell unexpectedly in August, slipping back to its lowest level in more than two-and-a-half years, with more than a third of residential construction firms cutting prices and roughly two-thirds of them offering some form of incentive to lure buyers sidelined by still-high mortgage rates and economic uncertainty.

The National Association of Home Builders/Wells Fargo Housing Market Index fell to 32, matching the lowest reading since December 2022, from 33 in July, the association said on Monday. Economists polled by Reuters had expected the sentiment score to improve to 34.

NAHB's measure of current sales conditions declined, and an index tracking future sales expectations was unchanged. Buyer foot traffic, though, edged up to its highest level since May, though it remains at a low level. On a regional basis, sentiment among builders in the Northeast skidded to its lowest level since January 2023, while it was unchanged in the South and Midwest and modestly improved in the West.

"Affordability continues to be the top challenge for the housing market and buyers are waiting for mortgage rates to drop to move forward," said NAHB Chairman Buddy Hughes, a home builder and developer from Lexington, North Carolina. "Builders are also grappling with supply-side headwinds, including ongoing frustrations with regulatory policies connected to developing land and building homes."

Mortgage interest rates have shown recent signs of easing amid expectations the Federal Reserve will resume its interest rate cuts at a policy meeting next month. The average rate on a 30-year fixed-rate mortgage, the most common U.S. home loan, slipped to 6.58% last week, the lowest level since last October, according to data from Freddie Mac. Rates have fallen nearly half a percentage point since the start of the year.

"Given a slowing housing market and other recent economic data, the Fed's monetary policy committee should return to lowering the federal funds rate, which will reduce financing costs for housing construction and indirectly help mortgage interest rates," NAHB Chief Economist Robert Dietz said.

The use of price and other incentives remains high, with 37% of builders cutting prices - by an average of 5% - while 66% offered some form of sales incentive, the highest percentage in the post-COVID-19 era.

On Tuesday the Census Bureau is due to report data for July on ground-breaking volumes and building permit filings for new homes, both of which remain depressed. In June, single-family housing starts fell to an 11-month low and permits for new homes plunged to the lowest level in more than two years. Economists polled by Reuters see little prospect for improvement in July's data.