A real estate consultant shows a condo to a prospective buyer in Miami, Florida.Joe Raedle | Getty ImagesAfter falling back earlier this month, mortgage rates began rising sharply again to the highest level since mid-July. That caused mortgage demand to pull back even further.Total mortgage application volume fell 3.7% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Volume was 63% lower than the same week one year ago.The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 5.80% from 5.65%, with points rising to 0.71 from 0.68 (including the origination fee) for loans with a 20% down payment. That rate was 3.11% one year ago.”Mortgage rates and Treasury yields rose last week as Federal Reserve officials indicated that short-term rates would stay higher for longer. Mortgage rates have been volatile over the past month, bouncing between 5.4 percent and 5.8 percent,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.As a result, refinance demand, which is highly sensitive to weekly rate moves, fell another 8% for the week and was 83% lower than the same week one year ago. The refinance share of mortgage activity decreased to 30.3% of total applications from about 66% a year ago.Mortgage applications to purchase a home dropped 2% for the week and were 23% lower than the same week one year ago.”Purchase applications have declined in eight of the last nine weeks, as demand continues to shrink due to higher rates and a weaker economic outlook,” Kan said. “However, rising inventories and slower home-price growth could potentially bring some buyers back into the market later this year.”Home prices are still well above year-ago levels, but they did decline 0.77% from June to July. It was the first monthly fall in nearly three years, according to Black Knight, a mortgage software, data and analytics firm.While the drop may seem small, it is the largest single-month decline in prices since January 2011. It is also the second-worst July performance dating back to 1991, behind the 0.9% fall in July 2010, during the Great Recession.Given the recent volatility in mortgage rates, the spread between jumbo and conforming loan rates widened again. Jumbos, which used to carry higher rates due to the size of the loans, are now 48 basis points lower than conforming loans. That spread went over 50 basis points in July. This is likely because jumbos are not backed by the government, which has stricter risk tolerance, but held on bank balance sheets. Banks right now are desperate for mortgage business.