Rising interest rates are now clearly taking their toll on potential homebuyers. Total mortgage application volume fell 4 percent last week from a week earlier and plunged 16 percent from a year ago, according to the Mortgage Bankers Association's seasonally adjusted index.

Mortgage applications to purchase a home led the volume lower, falling 5 percent for the week to the lowest level in two years. Purchase applications were 0.2 percent lower than a year ago.

"Housing supply has been quite constrained for several years. As a result, the housing market has been out of whack, with home prices increasing at twice the rate of income growth," said Michael Fratantoni, the MBA's chief economist. "That was not sustainable."

Rising interest rates are now weakening affordability further.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) increased to 5.15 percent from 5.11 percent, with points increasing to 0.51 from 0.50 (including the origination fee) for loans with 20 percent down payments. That is the highest rate since April 2010.

Read more in CNBC.