WASHINGTON (

TheStreet

) -- Mortgage applications dropped 12.9% last week as

mortgage rates

edged higher.

The volume of mortgage loan applications fell 12.9% on a seasonally adjusted basis in the week ending Jan. 21, the Mortgage Bankers Association said Wednesday.

Mortgage activity rose 5% in the prior week.

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Refinancing application volume dropped 15.3% from the previous week, following a 7.7% increase in the prior week, to its lowest level since Jan. 2010. Home-purchase loan applications decreased 8.7% week-over-week to its lowest level since October. On an unadjusted basis, the MBA's purchase index was 20.8% lower than in the year-earlier week.

A total of 70.3% of all loan applications last week were for refinancing existing mortgages, down from a 73% share in the prior week.

The average rate on a 30-year fixed mortgage edged higher to 4.8%, from 4.77% in the prior week, following three consecutive weeks of declining rates.

While the housing market remains sluggish and is unlikely to materially improve in the near future, there are some signs of future recovery.

Sales of newly built homes spiked 17.5% in December to a seasonally adjusted annual rate of 329,000, the Commerce Department said Wednesday morning, a far bigger jump than expected.

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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.

The

SPDR S&P Homebuilders

(XHB) - Get Report

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

iShares Dow Jones US Home Construction

(ITB) - Get Report

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

The government data followed a report last week from the National Association of Realtors which showed that

existing-home sales rose 12.3% in December to a seasonally adjusted annual rate of 5.28 million units, topping Wall Street's expectations. While the rate improved, it remained 2.9% below the 5.44 million units recorded in December 2009.

"December was a good finish to 2010, when sales fluctuate more than normal," said Lawrence Yun, NAR chief economist. "The December pace is near the volume we're expecting for 2011, so the market is getting much closer to an adequate, sustainable level."

Pending home sales rebounded 3.5% in November but remained 20.5% lower than in the year-earlier month. Data on December's pending home sales is expected to be reported on Thursday.

On Tuesday the

S&P/Case-Shiller 20-city index of national home prices came in 1.6% lower for November, after

declining 0.8% in October, a slightly larger than expected drop. The 10-city composite showed a 0.4% decline in November.

The S&P/Case-Shiller 20-city index is a moving three-month average, so data for November was swayed by data from October and September.

Home prices fell in 19 of the 20 metropolitan statistical areas (MSAs) month-over-month. Just four MSAs -- Los Angeles, San Diego, San Francisco and Washington -- showed year-over-year gains, while eight markets -- Atlanta, Charlotte, Detroit, Las Vegas, Miami, Portland (OR), Seattle and Tampa -- fell to their lowest levels since home prices peaked in 2006 and 2007.

A variety of factors have kept potential buyers from making home purchases in recent months despite

mortgage rates

at near-record lows. Still-high unemployment, a lack of credit and the

expiration of federal tax credits for homebuyers are obvious reasons. The recent

foreclosure scandal also plays its part.

-- Written by Miriam Marcus Reimer in New York.

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