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U.S. Home Loan Demand Plunges as Interest Rates Soar

U.S. mortgage applications plunged last week, and demand hit its lowest level since the start of the year as interest rates surged, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended Feb. 15 fell 22.6 percent to 822.8, the lowest level since the week ended Jan. 4.

The U.S. housing market is currently suffering one of the worst downturns in history. Last week's plummet in demand may indicate what is in store for the hard-hit sector this spring, which is the peak home-buying season.

Torsten Slok, senior economist at Deutsche Bank in New York, said the MBA's data helps cement his bearish view on the U.S. housing sector.

"Most housing indicators suggest that we may not get the spring selling season that we are hoping for," he said.

"By lowering interest rates the Fed is trying to boost demand for housing, but currently it is not only the level of interest rates that matters but also tight lending standards and limited availability of credit," Slok said.

It was the second straight week that the index fell, after having risen every week since the start of the year. The index in the prior week dropped by 2.1 percent.

Rising default rates in the subprime mortgage market, which caters to borrowers with poor credit histories, is one of the root causes of the problems plaguing the housing market. The market's meltdown has caused a widespread tightening of underwriting standards by lenders. Nowadays, larger down payments on a home and higher FICO scores are in many cases mandatory.

"The key issue is not interest rates, but the tightening of lending standards and that is going to be keeping things subdued for quite some time," Slok said.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.09 percent, up 0.37 percentage point from the previous week, the highest since late December.

Interest rates were below year-ago levels of 6.19 percent.

Mortgage rates have been rising along with U.S. Treasury yields recently. The benchmark 10-year U.S. Treasury note yield briefly hit 3.915 percent on Tuesday, its highest since early January. Yields move inversely to price.

Overall mortgage applications last week were 35.6 percent above their year-ago level. The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was down 3.8 percent to 1,007.0.

Fixed 15-year mortgage rates averaged 5.55 percent, up from 5.18 percent the previous week. Rates on one-year adjustable-rate mortgages (ARMs) were unchanged at 5.72 percent.

Home Purchase Demand Nears 5-Year Low

Another indication the U.S. housing market is still on the skids was last week's drop in demand for home purchase loans.

The MBA's seasonally adjusted purchase index, widely considered a timely gauge of new home sales, dropped 11.5 percent to 357.6, its lowest level since April 25, 2003.

The index came in below its year-earlier level of 381.4, a drop of 6.2 percent.

Home purchase applications have has been trending lower over the past two months, but the drop has not been nearly as severe as the fall in home sales, according to Michelle Meyer, an economist at Lehman Brothers in New York.

"We continue to emphasize that mortgage applications are a poor indicator of future home sales," she said in commentary published Wednesday.

The drop in overall applications last week was largely driven by decreased demand for home refinancing loans. Consumers seeking to refinance their existing home loans tend to be highly sensitive to shifts in interest rates.

The group's seasonally adjusted index of refinancing applications decreased 27.9 percent to 3,533.8. The index was up 83.9 percent from its year-ago level of 1,921.1.

The refinance share of applications decreased to 61.7 percent from 67.4 percent the previous week. The ARM share of activity increased to 12.8 percent, up from 9.9 percent the previous week.

The MBA's soft data preceded a separate weak housing report.

The Commerce Department said permits to break new ground on U.S. homes in January decreased 3 percent to the lowest rate in more than 16 years while housing starts rose 0.8 percent.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.