Applications for U.S. home mortgages decreased last week amid a sharp drop in purchasing and refinancing activity even as mortgage rates eased, an industry group said on Wednesday.

The Mortgage Bankers Association (search) said its seasonally adjusted index of mortgage application activity decreased 10.5 percent to 699.2, more than offsetting the 9.4 percent gain during the previous week.

The MBA's seasonally adjusted index of refinancing applications dropped 10.0 percent to 2036.7, after rising 9.8 percent the prior week.

The MBA's purchase index, a gauge of loan requests for home purchases, fell 10.8 percent to 469.3, after climbing 9.4 percent the week before.

The weak demand for mortgages came despite lower interest rates on fixed- and adjustable-rate loans last week.

According to the MBA, fixed 30-year mortgage rates (search) averaged 5.73 percent last week, excluding fees, down 4 basis points from 5.77 percent the previous week.

Rates have been trending lower in recent weeks, with the fixed 30-year mortgage rate at 5.91 percent in early April. Interest rates are also much lower than where they stood a year ago. The fixed 30-year mortgage rate as of May 14, 2004 was 6.21 percent, according to MBA data.

The average contract interest rate for 15-year fixed-rate mortgages also fell last week, down 6 basis points to 5.28 percent from 5.34 percent a week earlier.

Rates on one-year adjustable-rate mortgages, or ARMs, fell to 4.11 percent from 4.20 percent the prior week.

Applications for ARMs fell to 33.9 percent of total applications from 35.3 percent the previous week, the MBA said.

Refinancings increased as a percentage of all mortgage applications, at 39.3 percent of total applications from 39.2 percent the previous week.

Despite the drop in demand for mortgages last week, recent economic data points to a housing market that is still going strong.

Housing starts soared 11 percent last month, the Commerce Department (search) said Tuesday. Groundbreaking for new homes picked up to a 2.038 million unit rate from a 1.836 million pace in March -- above forecasts of a 1.980 million unit rate.

Low mortgage rates have supported the housing sector, generating economic growth in recent years.

While, industry analysts and economists have said they expect home sales to edge off their record 2004 levels as the Federal Reserve (search) raises rates, demand still appears to be robust.

The MBA's survey covers approximately 50 percent of all U.S. retail residential mortgage originations. It has been conducted weekly since 1990.

Respondents include mortgage bankers, commercial banks and thrifts.