Use C:\YourWebSite (where C: is your hard drive).
Setting up your Local Site and Project Files -
What operating system and version of DW are you running. This be due to the folder selection bug in which case you need to either manually type in the site root path, or select on level below the correct site root folder. If you check your local site path, is it pointing to the correct location?
No it keeps defaulting to the folder before where my new folder should be. I'm using CS4 on Windows 7.
>No it keeps defaulting to the folder before where my new folder should be.
This is a known bug. Use either workaround I mentioned before.