WASHINGTON ( TheStreet) -- Mortgage applications increased 2.3% last week as mortgage rates fell slightly following seven weeks of gains.

For the week ending Dec. 31, the volume of mortgage loan applications increased 2.3% after falling 3.9% in the prior week to the lowest level since December of 2009. Both weeks' results included adjustments to account for the Christmas and New Year's Day holidays.

The Mortgage Bankers Association reported data on Wednesday for the weeks ending Dec. 31 and Dec. 24. The MBA typically reports on mortgage activity each week but did not do so last week as it made adjustments for the Christmas holiday.

As mortgage activity fell then rose sequentially in the past two weeks, mortgage rates moved inversely, rising in the first reporting week and falling in the next. For the week ending Dec. 31, the average rate on a 30-year fixed mortgage fell to 4.82% after rising to 4.93% in the prior week.

Refinancing activity increased 3.9% last week while home-purchase loan applications decreased 0.8%. In the week prior, refinancing activity decreased 7.2% while the purchase index increased 3.1%. A total of 71% of all loan applications in the week ending Dec. 31 were for refinancing existing mortgages, up from 70.3% in the prior week. 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.

At year-end, home-purchase applications were 31% below their 2010 peak in April.

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 TheStreet recently.

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He 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 homes...it comes down to perceptions of affordability."

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 TheStreet. "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 TheStreet 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.

The SPDR S&P Homebuilders ( XHB), 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) 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), 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.

Hovnanian Enterprises ( HOV) narrowed its quarterly losses in its fiscal fourth quarter, ended Oct. 31 but said it sold 13% fewer homes in the period.

Stocks in the homebuilder sector were mostly higher on Wednesday. The SPDR S&P Homebuilders gained 1.2% at midday while the iShares Dow Jones US Home Construction ETF added 1.6%.

Among individual builders, Toll Brothers rose 2.6%, Lennar ( LEN) 1.9%, D.R. Horton ( DHI) 2.7%, PulteGroup ( PHM) 3.5% and KB Home 2.3%.

-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here: Miriam Reimer.

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