Demand for mortgage applications slid last week to its weakest level in more than five months, an industry group said on Wednesday, underscoring that the beleaguered U.S. housing sector has yet to bottom.

The Mortgage Bankers Association's seasonally adjusted mortgage applications index dipped 0.3 percent to 607.1 in the week ended July 27. The index sank for a third straight week, to a level just above this year's low of 606.6 in the Feb. 16 week.

Applications to buy homes are unlikely to jump much any time soon, and loan approval could get even tougher, several analysts said.

Fears triggered by mounting subprime mortgage failures are also spilling into the broader markets, compelling lenders to make it harder for borrowers with better credit to get mortgages approved.

"A further decline in mortgage rates should enable more prospective buyers to get a mortgage, all else equal," according to Nancy Vanden Houten, analyst at Stone & McCarthy Research Associates. "However, if declining rates are a function of credit concerns in the mortgage market, lenders may be pulling back further, offsetting some of the impact of lower rates."

The MBA's purchase index fell 1.8 percent to a seasonally adjusted 416.6, the lowest since it hit 411.0 in the week of April 20.

Average 30-year mortgage rates, excluding fees, fell 0.09 percentage point in the week to 6.50 percent, helping drive up loan requests for mortgage refinancing last week.

The refinancing index rose 1.8 percent to a seasonally adjusted 1,724.1, the MBA said.

On a four-week moving average, which smoothes out weekly volatility, the MBA said its overall applications and purchase indexes were down and the refinancing gauge was up.

Long-term borrowing costs have strayed little during the summer after rising from the 6 percent to 6.25 percent range seen the first four months of the year.

Nonetheless, home prices are still falling in many regions, and home builders are less optimistic than any time since early 1991, based on recent industry reports.

Pending sales of existing homes posted the biggest monthly gain in June in more than three years. Sales were still lower than a year ago and it is too soon to say the sector has bottomed, the National Association of Realtors said on Wednesday.

Defaults, foreclosures and a credit crunch led some lenders to shutter business and others to cease offering certain riskier mortgages.

"There's no question, even in the last 120 days the products are different," said Steve Jacobson, president of Fairway Independent Mortgage Corp. in Madison, Wisconsin.

"There's a lot of fear out there, granted," he said. "It's a matter of how we address it as an industry, and it's all back to educating the consumer and counseling them through the process."

Part of the answer may be to advise buyers of different funding options, or even to wait longer.

"People should be challenged to have an investment in a property," Jacobson said. "Maybe the answer is don't buy today, buy a year from now, or 18 months from now. There are too many people that got into properties with no money down."