A key measure of home-purchase applications dropped again last week as consumer demand cooled sharply amid a recent surge in mortgage rates.

The Mortgage Bankers Association's index of mortgage applications fell 1.3% last week, according to new data published Wednesday. 

The data also showed that the average rate on the popular 30-year loan climbed to 7.41% from 7.31% the previous week, the highest level since December 2000. By comparison, just one year ago, rates hovered around 5.65%.

"Mortgage rates moved to their highest levels in over 20 years as Treasury yields increased late last week," said Joel Kan, MBA's deputy chief economist. "Based on the FOMC’s most recent projections, rates are expected to be higher for longer, which drove the increase in Treasury yields."

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The steeper rates weighed heavily on housing demand, with applications for a mortgage to purchase a home sliding 2% for the week. Application volume is down 27% compared with the same time last year.

Demand for refinancing also continued to fall last week, sliding another 1%, according to the survey. Compared with the same time last year, refinance applications are down 21%.

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"Both prospective homebuyers and homeowners continue to feel the impact of these elevated rates," Kan said. "Many homeowners have little incentive to refinance."

The interest rate-sensitive housing market has cooled rapidly in the wake of the Federal Reserve's aggressive tightening campaign. Policymakers have lifted the benchmark federal funds rate 11 times as they try to crush stubborn inflation and slow the economy. 

Officials signaled during their policy-setting meeting last week that another rate hike is on the table this year – and that rates are likely to remain elevated for some time.

Not only are higher mortgage rates dampening consumer demand, but they are also limiting inventory.

That is because sellers who locked in a low mortgage rate before the pandemic have been reluctant to sell with rates continuing to hover near a two-decade high, leaving few options for eager would-be buyers.

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The number of available homes on the market at the end of July was down by more than 9% from the same time last year and down 46% from the typical amount before the COVID-19 pandemic began in early 2020, according to a recent report from Realtor.com.