Mortgage rates continued their rapid climb this week, posting their largest one-week gain since 1987 in a likely precursor to a slowdown in the US housing market after its pandemic-era boom.

The average contract interest rate on a 30-year fixed-rate mortgage was 5.78% as of Thursday, according to updated data from Freddie Mac. The key mortgage rate is up from 5.23% just one week ago and from 2.93% in the same week one year ago.

“These higher rates are the result of a shift in expectations about inflation and the course of monetary policy. Higher mortgage rates will lead to moderation from the blistering pace of housing activity that we have experienced coming out of the pandemic, ultimately resulting in a more balanced housing market.”

The major surge in mortgage rates has occurred alongside the Federal Reserve’s scramble to tighten monetary policy in response to inflation that has reached four-decade highs. The Fed raised its benchmark interest rate by three-quarters of a percentage point this week for the first time since 1994.

While the Fed’s action does not have a direct impact on mortgages, rates are moving higher as the economy adjusts to inflation that hit 8.6% in May and the resulting economic policy expectations. The central bank is aiming to cool spending by making it more expensive to borrow money.  

The 15-year fixed-rate mortgage averaged 4.81% for the week ending Thursday, up from 2.24% the same week one year earlier.

Home sales and prices surged during the COVID-19 pandemic, driven by the onset of remote work, lenient borrowing conditions and a shortage of available inventory on the market. But there are signs that the rising mortgage rates are bringing the housing market down from its record heights.

The volume of mortgage applications hit a 22-year low earlier this month as inflation saps buying power, according to data from the Mortgage Bankers Association. Refinance applications have also dropped by 75% year-over-year.

 So far, the mortgage rate increased haven’t resulted in lower purchase prices. Home prices climbed 20.6% in March compared to the same month one year, according to the S&P CoreLogic Case-Shiller Home Price Index.

But some real estate firms are already tightening their belts in preparation for a decline in demand. Redfin and Compass each revealed this week that they would cut hundreds of jobs due to difficult economic conditions.

“With May demand 17% below expectations, we don’t have enough work for our agents and support staff, and fewer sales leaves us with less money for headquarters projects,” Redfin CEO Glenn Kelman said in a note to staffers.