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) -- Mortgage applications increased 2.2% last week as

mortgage rates

edged lower.

The volume of mortgage loan applications increased 2.2% on a seasonally adjusted basis in the week ending Jan. 7, the Mortgage Bankers Association said early Wednesday.

Mortgage activity rose 2.3% in the prior week.

Refinancing application volume increased 4.9% from the previous week, following a 3.9% uptick in the prior week. Home-purchase loan applications fell 3.7% in the week, on a seasonally adjusted basis, after falling 0.8% a week earlier. On an unadjusted basis, the MBA's purchase index was 10.5% lower than in the year-earlier week.

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A total of 72.1% of all loan applications last week were for refinancing existing mortgages, up from a 71% share in the prior week.

The average rate on a 30-year fixed mortgage fell to to 4.78%, from 4.82% in the prior week. It was the second consecutive week of declines in the 30-year fixed rate and remains 15 basis points below the survey's seven-month high observed two weeks ago. Still, mortgage rates remain near all-time lows.

Rising mortgage rates, which some market watchers view as deterring home buying activity, are not likely to continue to rise, but are also unlikely to return to record lows seen in recent months, Paul Anastos, president of Mass.-based Mortgage Master, told



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Anastos said that

better-than-expected existing-home sales data for November was encouraging. "We can draw a conclusion that potential buyers are seeing a relationship between still-low mortgage rates and favorable prices to buy comes down to

perceptions of affordability."

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Despite the uptick, the road to a sustainable housing recovery is long, Anastos said.

November's pace of existing-home sales remained 27.9% below those of Nov. 2009, which was the initial deadline for the

first-time buyer tax credit.

"It comes down to the basics. Unemployment remains high and consumer confidence remains low, so people are not in a position to be out buying homes," he told


. "We're at the best home affordability levels seen in 30 or 40 years, but it comes down to confidence. Can I make payments? Will I have a job? This is driving the housing market."

Anastos said

rising mortgage rates are not likely to continue to rise, but are also unlikely to return to record lows seen in recent months.

Disappointing November homebuilding permits data further confirms that the "housing market recovery remains fragile at best," Kevin Brungardt, CEO of RoundPoint Financial, a mortgage origination and servicing firm, told the


last month.

Existing-home sales rose 5.6% in November while

new-home sales increased 5.5% in the month.

He cited the usual suspects of high unemployment, potential buyers' low confidence in the stability of home prices and the large inventory of distressed properties that still need to be cleared.

Brungardt estimated that the shadow inventory of homes could take two to three years to clear to a point where housing supply and demand begin to match up again, and that no acknowledged housing bottom will appear until that shadow inventory is significantly curtailed.

Homebuilders should expect material dampening of

new-home purchases until then, Brungardt forecast. Current homeowners will also continue to be impacted unfavorably.

Brungardt added that the recent spike in

mortgage rates -- a jump of 70 basis points over a short period of time -- also worked to delay a housing market recovery. Rates are still historically low, he conceded, but need to stay in the 4.5% to 4.75% range in order to fuel a meaningful recovery. He expects mortgage rates will fall again and then level out for a period of time.

The homebuilder sector is well off its late-spring peak, when

buyers were rushing to take advantage of federal tax credits for homebuyers, and is only slightly higher than at the beginning of 2010. Whereas other sectors have begun a rebound in earnest, the housing sector continues to lag.


SPDR S&P Homebuilders

(XHB) - Get SPDR S&P Homebuilders ETF Report

, an exchange-traded fund that tracks the homebuilder sector, remains more than 60% off its peak of $46.08 in early 2006. The

iShares Dow Jones US Home Construction

(ITB) - Get iShares U.S. Home Construction ETF Report

ETF remains more than 70% off its peak of $50.10 in the spring of 2006.

Some potential homebuyers have decided to go ahead and sign contracts, hoping to lock in still-relatively-low rates. Homebuilder

Toll Brothers

(TOL) - Get Toll Brothers, Inc. Report

, which surprised investors with a return to year-over-year profitability in its fiscal fourth quarter, recently said deposits jumped 10% in the second half of November compared with year-earlier results.


(LEN) - Get Lennar Corporation Class A Report

, which posted better-than-expected fiscal-fourth quarter earnings on Tuesday, said new-home deliveries were down 12% in its recent quarter to 3,089. Orders for new homes fell 5% to 2,520.

KB Home

(KBH) - Get KB Home Report

, which posted a surprise quarterly profit on Friday, said fewer homes delivered in its recent quarter was partially offset by an increase in the average selling price.

Small-cap builder

Hovnanian Enterprises

(HOV) - Get Hovnanian Enterprises, Inc. Class A Report

sold 13% fewer homes in its fiscal fourth quarter, while completed sales fell almost 17% year-over-year, despite narrowing its net losses.

Stocks in the homebuilder sector were mostly higher on Wednesday. The SPDR S&P Homebuilders gained 0.4% in the first minutes of trading while the iShares Dow Jones US Home Construction ETF added 0.3%.

Among individual builders, Toll Brothers rose 0.7%,

D.R. Horton

(DHI) - Get D.R. Horton, Inc. Report



(PHM) - Get PulteGroup, Inc. Report

0.3%, KB Home 0.3% and Lennar 0.2%.


Written by Miriam Marcus Reimer in New York.

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