Higher mortgage rates are hitting the refinance market hard and may finally be taking their toll on homebuyers.

Mortgage application volume fell 2.2% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) did fall slightly to 3.33% from 3.36%, with points decreasing to 0.39 from 0.42 (including the origination fee) for loans with a 20% down payment. The rate, however, had been rising for seven straight weeks and is now significantly higher than at the start of this year.

As a result, applications to refinance a home loan decreased 3% for the week and were 32% lower than a year ago. The refinance share of mortgage activity decreased to 60.6% of total applications from 60.9% the previous week.

“Higher mortgage rates continue to shut down refinance activity, as the pool of borrowers who can benefit from a refinance further shrinks,” said Joel Kan, an MBA economist.

Mortgage applications to purchase a home fell 2% for the week but were 39% higher than a year ago. That large and seemingly strong annual comparison, however, is due to the fact that the entire housing market basically stalled when the pandemic hit a year ago. It then came roaring back just a few months later. The weekly drop is likely more indicative of what’s happening now with homebuyers.

“Many prospective homebuyers this spring are feeling the effects of higher rates and rapidly accelerating home prices,” said Kan. “Record-low inventory is pushing home-price growth at double the rate from a year ago, and even above the 10% growth rates seen in 2005. The housing market is in desperate need of more inventory to cool price growth and preserve affordability.”

Mortgage rates started this week on the upswing yet again. Some believe higher rates will help to cool the growth in home prices because potential buyers will simply be sidelined. Demand, however, does not appear to be abating, and the inventory situation is not easing at all, even with the onset of the popular spring season.