By Julie Haviv
NEW YORK (Reuters) - Mortgage applications slumped last week as interest rates on 15- and 30-year fixed-rate mortgages rose for the first time in six weeks, data from an industry group showed on Wednesday.
Interest rates, however, are not far from record lows and the drop in demand does not bode well for the housing market, which has been showing signs of improvement but remains highly vulnerable to setbacks.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended October 15 decreased 10.5 percent. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 0.4 percent.
Demand for home refinancing loans fell for the sixth time in seven weeks. The MBA's seasonally adjusted index of refinancing applications decreased 11.2 percent.
Mark Vitner, senior economist at Wells Fargo Securities in Charlotte, North Carolina, said the drop in demand is a reflection of the inability of many homeowners to take advantage of record low interest rates.
"Tight lending standards are preventing many homeowners from home loan refinancing," he said. "Low credit scores and high unemployment are also playing a big role."
Vitner said "underwater" mortgages -- where the amount owed on the mortgage exceeds the value of the home -- are one of the biggest banes of the homeowners.
This negative equity makes many of them unqualified for home loan refinancing and prevents some from selling.
The drop-off in home loan refinancing demand does not bode well for the flailing U.S. economy as this activity typically encourages an increase in consumer spending.
By lowering monthly mortgage payments, lower rates may also help some homeowners avoid default and foreclosure if their credit is good enough.
The MBA's seasonally adjusted purchase index, a tentative early indicator of home sales, decreased 6.7 percent.
The housing market has been struggling since the April 30 expiration of popular home buyer tax credits. To take advantage of the tax credits, buyers had to sign purchase contracts by April 30. Contracts originally had to close by June 30, but that was extended by three months.
Encouraging news on housing, however, emerged this week.
The Commerce Department said on Tuesday U.S. housing starts unexpectedly rose in September to a five-month high.
Vitner said home sales and housing construction should be modestly stronger next year, while home prices will probably continue to fall for another 6 to 9 months before bottoming in the spring.
"We expect a recovery in housing to be agonizingly slow," he said.
Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.34 percent, up 0.13 percentage point from the previous week. Interest rates were also below their year-ago level of 5.07 percent
The previous week's interest rate was the lowest level in the survey, which has been conducted weekly since 1990.
The MBA said fixed 15-year mortgage rates averaged 3.74 percent, up from the previous week's record low of 3.62 percent. Rates on one-year adjustable-rate mortgage, or ARMs, increased to 7.17 percent from 7.03 percent.
(Editing by Diane Craft)