Refinance volume has been falling for the past month as rates rise, dipping another 4 percent last week to the lowest level since December 2000. Refinances are 27 percent lower than a year ago and now make up just under 36 percent of mortgage application volume. Most borrowers who were able to qualify, refinanced during the last five years, as rates stalled near record lows.

That was the primary driver behind a 2.6 percent drop in total mortgage application volume last week, according to the Mortgage Bankers Association's seasonally adjusted report. Volume was 10.5 percent lower than a year ago.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) increased to its highest level since April 2011, 4.86 percent, from 4.77 percent. Points increased to 0.52 from 0.50 (including the origination fee) for 80 percent loan-to-value ratio loans. Mortgage rates follow loosely the yield on the 10-year Treasury.

"Treasury rates increased 10 basis points last week, driven largely by favorable news on retail sales data and industrial production in April, which more than offset data showing still-slow new residential construction," said Joel Kan, an MBA economist.

Mortgage applications to purchase a home also fell, down 2 percent for the week. Volume is just 3 percent higher than a year ago. While rates are sidelining some potential buyers, the severe shortage of homes for sale is a far greater deterrent. The lack of listings amid strong demand is causing home prices to rise at an increasingly fast clip.

"Purchase applications decreased over the week while the average loan amount for purchase loans increased to over $320,000 after averaging around $317,000 for the past four weeks, likely a sign that inventory for lower-priced homes remains low and the mix is still skewed toward larger loan balances," Kan said.

The share of borrowers applying for adjustable-rate mortgages also rose. ARMs offer lower interest rates than fixed-rate mortgages and are therefore more popular when prices rise and it becomes harder to afford a home.

Interest rates have so far moved sideways this week, with little economic news to push them in either direction. After the latest jump, however, it is clear that the market is solidly in a rising rate mode, and lenders are therefore less likely to lower rates on small moves in the bond market.