Dec. 1 (Bloomberg) -- U.S. mortgage applications fell for a second week as the highest mortgage rates in two months resulted in fewer home purchases and less refinancing, a private group's survey found.

The Mortgage Bankers Association's applications index declined 5.8 percent to 673.3 from 715 in the prior week. The group's gauge of mortgage refinancing fell 12.3 percent to 1912.3, the lowest since the end of August, from 2179.3.

Home purchases dropped 0.6 percent, bringing the index to 460.3, close to the record of 501.6. Signs of stronger economic growth and forecasts Federal Reserve policy makers will keep raising their benchmark interest rate are pushing up mortgage rates. The average 30-year fixed rate rose to 5.78 percent.

``The housing market is going to stay strong for a long time, but we've already reached the high-water mark,'' said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio. ``It's not so much a matter of mortgage rates anymore. It's more a matter of the pent-up demand for housing being satisfied.''

The mortgage bankers group's report showed the average 30- year fixed mortgage rate rose to the highest since the week ended Oct. 1. It was 5.64 percent the previous week and compares with a record-low of 4.99 percent in 2003.

At the current 30-year rate, the cost for each $100,000 borrowed is $585.48. When mortgage rates were a record low in June 2003, the monthly borrowing cost for each $100,000 was $536.21.

David Lereah, chief economist of the National Association of Realtors, forecasts home sales will decline next year for the first time since 1999. For now, the residential market remains very strong, he said.

Starts and Sales

Housing starts reached their highest level of the year in October. New home sales during the month were the third-highest on record and existing home sales were the fourth-highest.

The National Association of Realtors, the U.S. industry's largest trade group, estimates that previously owned home sales will reach a record 6.54 million and new home sales will reach an all-time high of 1.17 million this year.

``This is a reasonably good situation because mortgage rates go up when the economy is strong, but their impact is likely to be offset by more job creation and consumer confidence, which are positives for the housing market,'' said Ara Hovnanian, president and chief executive officer of Hovnanian Enterprises Inc., the largest homebuilder in New Jersey.

The U.S. economy created 337,000 jobs in October. The Labor Department is forecast to report 193,000 more were added last month.

Other Rates

The average rate on a 15-year mortgage rose to 5.17 percent last week from 5.08 percent. Adjustable rate mortgages accounted for 32.3 percent of all applications, down from 34 percent a week earlier. The rate on a one-year adjustable rate mortgage fell to 4.12 percent from 4.13 percent, the Mortgage Bankers Association said.

Refinancing's share of total applications fell for the third straight week, decreasing to 46.4 percent last week from 48.4 percent.

``What we're seeing now is a broadening of economic growth,'' said Robert Mellman, an economist with J.P. Morgan Securities Inc. in New York. ``The biggest (challenge) to housing is a strong economy that holds mortgage rates up and that's what we're moving toward.''

To contact the reporter on this story: Victor Epstein in Washington vepstein@bloomberg.net

Last Updated: December 1, 2004 07:00 EST