U.S. MBA's Mortgage Applications Fell 1.6% Last Week (Update1)

March 22 (Bloomberg) -- A gauge of U.S. mortgage applications fell last week to the lowest level of the year as home purchases and refinancing declined, a sign housing will be less of a source of strength for the economy.

The Mortgage Bankers Association's weekly application index dropped 1.6 percent to 565.0 from 574.4. The Washington-based group's purchase gauge fell 2.3 percent to 393.6 from 403.0.

A rise in mortgage rates this year is limiting sales and making it less profitable to refinance existing loans. Home sales are forecast to decline after five years of records and price appreciation may slow, limiting refinancing that's helped power consumer spending and the economy.

``Housing-related activity has definitely slowed and its contributions to economic growth, both direct and indirect, will fade over the next couple of quarters,'' said Steven Wood, chief economist at Insight Economics in Danville, California.

Purchase applications are down 26 percent since reaching a high in June of last year, the mortgage bankers group said.

The average rate on a fixed 30-year mortgage fell to 6.31 percent last week from 6.42 percent the prior week, the bankers' group said. Borrowing costs for every $100,000 of a loan would be $619.62 a month, based on last week's contract rate for a 30- year fixed mortgage, compared with $596.34 a year ago when the average rate was 5.95 percent.

Federal Reserve policy makers have raised their benchmark interest rate 14 consecutive times since June 2004, and most economists surveyed by Bloomberg News forecast at least two more increases this year from the current 4.5 percent.

The mortgage bankers group's gauge of refinancing fell 0.6 percent to 1574.5 from 1583.6. The index is down 47 percent from a 12-month high reached in June.

Refinancing

The cash extracted by homeowners from refinancing conventional mortgages may drop to $117 billion this year from an estimated $243 billion last year, according to a report last month from Freddie Mac, the No. 2 buyer of mortgages.

As the housing market cools, consumer-spending growth from April through June will slow to 2.9 percent from an estimated pace of 4.7 percent this quarter, according to the median estimate in a recent Bloomberg News survey of 74 economists.

The National Association of Realtors forecasts sales of new and previously owned homes to fall 6 percent to 7.85 million this year from a record 8.35 million in 2005, the National Association of Realtors said on March 13. The median existing home price will rise 6 percent to $220,300, about half last year's gain.

`Healthy Levels'

``Although the housing market is slowing down, we're returning back to more healthy levels than we have seen over the years,'' said John Sauro, president of North Atlantic Mortgage Corp. in an interview from Silver Spring, Maryland.

The average 15-year rate declined to 5.99 percent from 6.06 percent the week before, today's report showed. The rate on a one-year adjustable mortgage rose to 5.68 percent from 5.64 percent.

Refinancing's share of total applications rose to 38.1 percent last week 37.7 percent the week before. The portion of adjustable-rate mortgages fell to 28.3 percent from 28.8 percent.

The Mortgage Bankers Association's survey covers about half of all U.S. retail residential mortgage originations and has been compiled every week since 1990.

To contact the reporter on this story:

Bob Willis in Washington  bwillis@bloomberg.net