Published: Wednesday, 28 Oct 2009 | 7:07 AM ET

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U.S. home loan demand slid for the third straight week, the Mortgage Bankers Association said on Wednesday, with purchase applications the weakest since mid-May and refinancing requests at a two-month low.

The downturn comes as the $8,000 first-time homebuyer tax credit faces extinction unless Congress soon agrees on an extension.

Eligible borrowers who applied last week would unlikely be able to close their loan by the Nov. 30 deadline, industry experts said.

The program, as well as other government stimulus, helped lift the housing market from its deepest downturn since the Great Depression.

Whether housing has enough momentum once the supports are withdrawn is uncertain, many economists agree.

Both purchase and refinance applications fell last week even as average borrowing costs held steady with 30-year loan rates just above 5 percent.

The mortgage applications index fell 12.3 percent on a seasonally adjusted basis to 562.3, the Mortgage Bankers Association said. Purchase applications dropped 5.2 percent to 254.9 and refinancing demand sank 16.2 percent to 2,352.5 last week.

"The average individual is still pretty skeptical and still pretty easily spooked," said Daniel Penrod, senior industry analyst at California Credit Union League in Ontario, California.

As borrowers wait to see whether the tax credit and other incentives are prolonged, borrowing costs have stayed historically low and home prices have started stabilizing.

The average 30-year mortgage rate slipped 0.03 percentage point to 5.04 percent in the week ended Oct. 23.

Borrowers who got a loan in March saw record low rates of 4.61 percent, according to the MBA, sending the refinance applications index to almost triple the current level.

While rates hover above a psychologically pivotal 5 percent level, they are nonetheless much lower than 6.26 percent in the same week a year ago.

Home prices, meantime, have risen for four straight months after plunging for three years, based on the Standard & Poor's/Case-Shiller indexes. From their peak in 2006 through August, its indexes have toppled by roughly 30 percent.

Home prices in some areas of the country appear to be "bubble territory," Robert Shiller, a Yale University economics professor and co-developer of the S&P/Case-Shiller indexes, told Reuters Television on Tuesday. "It is a time of great uncertainty."

Many potential buyers are reticent to commit as some of the key federal housing supports verge on expiring and the unemployment rate at a 26-year high of 9.8 percent.

"We appear to have reached a bit of stability but are we sitting on a house of cards, and is there a little more pain in the system before we reach a true bottom?" Penrod said.

Among important external supports is a temporary increase this year in the size of loans that home funding companies Fannie Mae

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The limits were boosted to ease the housing crisis, providing a source for lenders to sell larger loans they create in higher-priced markets. The government will soon announce whether there will be any changes in 2010.

The emerging recovery could stall if those higher limits are not maintained, several industry experts said.

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