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Updated from 11:37 a.m. EDT

Mortgage loan applications tumbled 16.1% last week, reflecting the recent rise in interest rates.

The Mortgage Bankers Association's survey -- which tracks applications for mortgages to purchase homes as well as refinancing -- fell to 824.6 in the week ended Aug. 8 from 983.2 a week earlier.

The purchase index dropped 10.3% to a seasonally adjusted 409.6 from 456.4 in the previous week. Meanwhile, the refi index plunged 20% to a seasonally adjusted 3238.4 from 4047.5 a week earlier.

Last week's drop in mortgage applications comes as interest rates have moved up sharply in anticipation of a recovery in the economy. Although 30-year fixed-rate mortgages decreased to 6% last week from 6.37% a week earlier, they are up significantly from 5.33% only a month ago.

"This is a rate-driven phenomenon," said Christopher Low, an economist at First Tennessee Capital Markets. "The housing market is the most sensitive to interest rates."

Shares of homebuilders were lately lower.

Toll Brothers


was falling $1.64, or 5.5%, to $27.92. The company separately announced on Wednesday that it was selling 3 million shares of common stock for an estimated $87 million, which it will use for growth through the acquisition of residential development and for working capital.

Pulte Homes


was down $1.73, or 2.6%, to $63.79,

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was off $2.04, or 3%, to $65.40, and

D.R. Horton


was behind 93 cents, or 3.2%, to $28.19.

During the week ended Aug. 1, mortgage loan applications were up 1.1% to 983.2, as homeowners scrambled to lock in rates. "People who were sitting on the fence jumped into the market," said Low.

For his part, Low thinks that the housing market may take a backseat to other areas of the economy in the months ahead. "Housing's role could be diminished," he said.

In other economic news, retail sales were up 1.4% in July, the third straight month of gains. The results were stronger than economists had expected, and showed strength across the board. "Consumer spending is ramping up strongly," said Peter Kretzmer, an economist at Bank of America.

As the economy picks up, and interest rates march even higher, homebuilders are likely to suffer.

The sector has been a bulwark for the economy during its recent downturn, with interest rates falling to their lowest levels in 45 years. In the past three years, homebuilders have soared to high valuations. The

S&P 500 Homebuilder Index

is up 43% since January, while the S&P 500 is ahead 12%.

"Because interest rates have been so low for so long, there is very little pent up demand for housing," said Kretzmer. "As rates rise, we have to expect that demand for housing is going to flatten."