Interest rates are rising and mortgage demand fell to a 25-year low last week, continuing four consecutive months of declines.

Mortgage demand shrank 4% last week compared to the previous week and fell 38% compared to the same week a year ago, according to the Mortgage Bankers Association.

MBA reported that the average 30-year mortgage rate rose to 6.94% from 6.81%, the highest level since 2002. Refinancing applications have dropped sharply as well after borrowers took advantage of low-rate loans during the pandemic. The number of refinancing applications last week plunged 86% from the same week a year ago.

The Federal Reserve has hiked interest rates five times this year and a sixth increase is expected next month as the central bank attempts to stifle inflation, which is at a 40-year high.

"The speed and level to which rates have climbed this year have greatly reduced refinance activity and exacerbated existing affordability challenges in the purchase market," said MBA deputy chief economist Joel Kan. "Residential housing activity ranging from housing starts to home sales have been on downward trends coinciding with the rise in rates."

The plummeting demand, rising interest rates and supply issues contributed to an 8.1% decline in housing starts last month, according to the U.S. Department of Housing and Urban Development.

Homebuilder sentiment has fallen for the 10th consecutive month, the National Association of Home Builders reported.

"This will be the first year since 2011 to see a decline for single-family starts," NAHB chief economist Robert Dietz said. "And given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecasted to see additional single-family building declines as the housing contraction continues."