U.S. mortgage applications slid to this year's low as demand for loans to purchase homes fell last week to the lowest level since November 2003 despite a drop in interest rates, an industry trade group said Wednesday.

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The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications fell for the third straight week, down 3.7 percent in the week ended April 21 to 548.6 from the prior week's 569.6.

The MBA's seasonally adjusted purchase mortgage index fell 4.4 percent to 389.4 from the previous week's 407.4, its lowest since it touched 375.4 in the week ended Nov. 7, 2003. The index, widely considered a timely gauge of U.S. home sales, was well below its year-ago level of 482.0.

The drop in applications for home mortgages over the past three weeks portends a slide in house purchases following reports this week of surprising gains in March sales of existing and new homes, analysts said.

"Slumping mortgage demand, continued build-up in inventories and the fact that prices are now beginning to level off, which means the real cost of housing is going to rise — all this adds up to the fact that turnover is going to fall and fall sharply," said Richard Iley, senior economist at BNP Paribas.

Sales of new homes jumped 13.8 percent last month, the biggest monthly gain since April 1993, the Commerce Department reported Wednesday. However, prices fell sharply and inventories of unsold homes increased.

On Tuesday, the National Association of Realtors reported a 0.3 percent rise in existing home sales in March, spurred by buying in less-costly markets and warm weather.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.53 percent last week, down 0.03 percentage point from the previous week. The modest dip, however, was from a rate that was the highest since a 6.65 percent rate set in the week ended June 7, 2002.

The industry benchmark was substantially above its 2005 low of 5.47 percent in late June 2005 and above last year's high of 6.33 percent in the week of Nov. 11.

Rising rates and falling home prices are a combination that should slow demand for homes after a five-year record run.

"House prices had been rising much faster than the level of mortgage rates. That's now flipping around," Iley said. "That's a big fundamental shift in the housing market and that has to affect people's expectations and willingness to buy."

Historically low mortgage rates fueled the five-year housing boom that was a major driver of the U.S. economy. Although housing is still considered strong, rising interest rates are seen chipping away at the sector, as well as at consumer spending.

"A lot of homeowners were using their houses as ATM machines and buying durable goods such as refrigerators and cars" by tapping into their home equity for cash, said Bob Moulton, president of Americana Mortgage Group in Manhasset, New York. "As home equity lines of credit costs go up, I think you might eventually get somewhat of a slowdown in that segment."

Extensive oil price gains could also crimp consumers' ability to take on more housing and related debt, he added.

The MBA also said refinancing applications declined last week. Its seasonally adjusted index of refinancing applications fell 2.4 percent to 1,489.4, from 1,526.1 the previous week.

A year earlier the index was at 2,052.5.

The refinance share of mortgage activity increased to 36.7 percent of total applications from 36.4 the previous week.

The ARM share of activity fell to 28.2 percent of total applications from 28.9 percent the previous week. ARM demand reached a 2005 high of 36.6 percent in late March, and some ARM holders are seen leaning toward refinancing into fixed-rate loans.

Fixed 15-year mortgage rates averaged 6.18 percent last week, down from 6.19 percent. Rates on one-year adjustable-rate mortgages fell to 5.96 percent from 6.00 percent.

The MBA's survey covers about 50 percent of all U.S. retail residential mortgage originations. Respondents include mortgage bankers, commercial banks and thrifts.

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