Published: Thursday, 12 Nov 2009 | 7:02 AM ET

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Refinancing drove total U.S. mortgage applications higher last week as fixed borrowing costs fell further below 5 percent, but home purchase demand sank to a nine-year low, an industry group said on Thursday.

It was too soon for loan requests to reflect the extension and expansion of the federal home buyer tax credit program aimed at stoking the fragile housing market, economists said.

Average 30-year mortgage rates fell 0.07 percentage point to 4.90 percent in the week ended Nov. 6, making a new run toward the record low of 4.61 percent set in March, the Mortgage Bankers Association said.

Total mortgage applications rose 3.2 percent to a seasonally adjusted 627.5, spurred by an 11.3 percent jump in refinancing requests.

Loan refinancings accounted for 71.5 percent of all applications, the highest share since the 30-year mortgage rate was at about 4.7 percent in May.

Purchase applications slid 11.7 percent in the week to 220.9, the lowest reading since December 2000.

"The purchase market is muddling along," with unemployment at a 26-1/2-year high of 10.2 percent and mortgage credit still difficult to obtain, said Melissa Cohn, president of The Manhattan Mortgage Company.

Looming large are some massive government incentives that have been extended until the middle of next year.

The $8,000 first-time buyer tax credit was extended to cover mortgage loans that close by June 30, 2010; the program had been due to expire on Nov. 30. Income levels for eligible buyers were raised and the program was expanded to include a $6,500 credit for move-up buyers.

Purchases of more than $1.4 trillion of mortgage-related securities by the Federal Reserve due to end by March 31, and removing the bond market's biggest buyer likely means an end to the near-record low borrowing costs.

Once the Fed retreats, "the fear is that rates are going to go up strongly, so a lot of people are trying to get in the door now before that happens," Cohn said.

Housing activity early next year will start off strongly, she said. "Then once rates begin to go back up and we lose the tax credit, that's going to slow the real estate market down again."

Unemployment and fading incentives likely mean more foreclosures even though the government has stepped up efforts to modify loans for struggling borrowers, housing experts agree.

Sales of new homes in September posted the first drop in six months while existing home sales jumped to a two-year high.

Unemployment trumps the lure of average home prices that have toppled by more than 30 percent from their 2006 peak and mortgage rates that remain historically low, economists said.

"You've got a horrible economy but fantastic affordability," said John Burns, president of John Burns real estate consulting in Irvine, California. "Essentially the two are netting each other out right now."

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