Applications for U.S. home mortgages rose for the first time in three weeks despite higher interest rates, the Mortgage Bankers Association said Wednesday.

The Mortgage Bankers Association (search) said both purchasing and refinancing activity gained sharply in the week ended July 1.

The MBA said its seasonally adjusted index of mortgage applications increased 9.6 percent to 853.4, more than offsetting the previous week's 1.1 loss.

On a four-week moving average, the index is up 1.3 percent, from 783.4 to 795.0.

"The MBA numbers are pretty volatile and it is hard to get too excited over a single week's report," said Stephen Stanley, chief economist at RBS Greenwich Capital. "However, it does help confirm that the housing market continues to be extremely strong."

Industry analysts and economists have said they expect home sales to edge off record 2004 levels as the Federal Reserve (search) raises interest rates. But demand remains strong and has shown few signs of waning.

However, data released Wednesday by the National Association of Realtors (search) indicated that home sales in June and July may edge lower.

The NAR's Pending Home Sales Index, based on data collected in May, stood at 124.9, down 2.0 percent from April but 3.7 percent above the comparable month a year ago.

Despite the drop, May's reading marks the third-highest level on record, helping affirm the strength in the housing market.

Many analysts say housing prices will stop climbing when mortgage rates hit levels that will deter buying. But for now, they remain at rates that still entice consumers.

"In my opinion, the 30-year rate would have to move to close to 7 percent for demand to wane and I do not see that happening any time soon," Stanley said.

Fixed 30-year mortgage rates averaged 5.58 percent last week, excluding fees, up 11 basis points from 5.47 percent the previous week.

Mortgage rates are still lower than a few months ago. The 30-year mortgage rate hit 6.08 percent at the end of March, according to MBA figures. A year ago, it was at 5.96 percent.

The MBA's seasonally adjusted index of refinancing applications climbed 10.2 percent to 2788.2, after falling 1.8 percent the prior week.

The MBA's purchase index, a gauge of loan requests for home purchases, rose 9.1 percent to 520.8 after dropping 0.4 percent the previous week. The index is slightly below its record high of 529.3 reached in the week ended June 10.

The MBA also said the average contract interest rate for 15-year fixed-rate mortgages rose 12 basis points last week, to 5.18 percent from 5.06 percent a week earlier.

Rates on one-year ARMs rose to 4.60 percent from 4.42 percent the prior week.

Applications for adjustable-rate mortgages rose to to 30.7 percent of total applications from 30 percent, which was the lowest level in over a year, the MBA said.

ARMs continue to be popular loan vehicles. The low initial payments allow borrowers to buy homes that they would not necessarily afford with a fixed-rate loan.

Refinancings also increased as a percentage of all mortgage applications, at 45.7 percent, up from 45.4 percent the previous week.

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.

Home prices in some areas of the United States have risen so high and so quickly that an increasing number of people are voicing concerns over a housing bubble.

"There are areas within the country that are a full blown bubble and areas that are just frothy," RBS Greenwich Capital's Stanley said. "Either way, my view is that the balloon will slowly ease air out and not burst."