WASHINGTON ( TheStreet) -- Mortgage applications dropped sharply last week as mortgage rates edged higher.

The volume of mortgage loan applications decreased 16.5% on a seasonally adjusted basis in the week ending Nov. 26, the Mortgage Bankers Association said early Wednesday.

Refinancing applications decreased 21.6% from the previous week to the lowest level observed since June. It was the third consecutive weekly drop in refi activity. New-home purchase loan applications pushed 1.1% higher from the prior week to its highest level since the beginning of May.

A total of 74.9% of all loan applications last week were for refinancing existing mortgages, down from a 78.6% share observed in the prior week.

One reason for the decline in mortgage activity was the rise in mortgage rates. The average rate on a 30-year fixed mortgage increased to 4.56% from 4.5% in the prior week. It was the highest rate observed since August following increases in four of the last five weeks. Still, the rate remains near all-time lows.

>>Homebuilder Stocks: Behind the Numbers

Near-record-low mortgage rates failed to spark robust demand for housing in recent months, but continue to have an effect on homeowners looking to lower their monthly payments through refinancing, though even refi activity has been waning as mortgage rates bounce off earlier lows.

While any mortgage demand can be viewed in a positive light, the still-struggling housing market continues to be plagued by sluggish demand, in part because of the tight credit market and inability of many potential buyers to access the credit they need to finance a mortgage.

Many Americans suffer from negative equity, where the amount they owe on their home is higher than the value of it, making them unqualified for refinancing.

Still-depressed home prices do not seem to make it any easier. The S&P/Case-Shiller 20-city index of national home prices rose slightly in September but home prices across the U.S. fell 2% in third quarter after rising 4.7% in the second quarter.

September's 0.6% uptick disappointed market watchers who expected the index to rise 1% in the month.

>>Home Prices Continue to Cool

Several market watchers consider weakening home prices an ominous sign for the overall housing market.

"Another weak report, weaker than last month," said David M. Blitzer, chairman of the index committee at Standard & Poor's. "The national economy is certainly the number one issue for housing. Additionally, there is a large supply of houses on the market and further, hidden, supply due to delinquent mortgages, pending foreclosures or vacant homes. New construction is running at less than half the pace needed to meet normal demand, so a sustained recovery could be a ways off," Blitzer continued.

Sales of newly built homes unexpectedly fell 8.1% in October to a weaker-than-expected annual rate of 283,000, according to data released by the Commerce Department last week.

>>New-Home Sales Fall 8.1% in October

The government data followed a report from the National Association of Realtors which showed that sales of previously occupied homes fell 2.2% in October to a slightly better-than-expected seasonally adjusted annual rate of 4.43 million units.

>>Existing-Home Sales Fall 2.2% in October

Homebuilders began construction on 11.7% fewer homes in October to an annualized rate of 519,000, far worse than the expected contraction rate. Applications for building permits, meanwhile, inched 0.5% higher to 550,000, from 547,000.

>>Housing Starts Fall 11.7% in October

Pending home sales fell 1.8% in September, worse than expected and 24.9% lower than in the year-earlier month. A report on pending home sales in October is due out on Thursday. Economists expect the data to be flat after a 1.8% downtick in the prior month.

>>Pending-Home Sales Fall 1.8%

Stocks in the homebuilder sector were mixed but mostly higher Wednesday morning.

The SPDR S&P Homebuilders ( XHB - Get Report), an exchange-traded fund that tracks the homebuilder sector, rose 2.1% in the first thirty minutes of trading. The iShares Dow Jones US Home Construction ( ITB - Get Report) ETF added 1.9%.

Among individual builders, Standard Pacific ( SPF) gained 2.3%, PulteGroup ( PHM - Get Report) 1.8%, Lennar ( LEN - Get Report) 2.5% and D.R. Horton ( DHI - Get Report) 0.6%.

The SPDR S&P 500 ( SPY - Get Report) ETF pushed up 1.8% while the PowerShares QQQ Trust ( QQQQ) gained 2.1%.

-- Written by Miriam Marcus Reimer in New York.

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