June 17 (Bloomberg) -- Mortgage applications in the U.S. fell last week to the lowest level since November as a jump in borrowing costs discouraged refinancing and threatened to deepen the housing slump.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan dropped 16 percent to 514.4 in the week ended June 12, from 611 the prior week. The group’s refinancing gauge declined 23 percent, while the purchase index fell 3.5 percent.

“Higher mortgage rates will keep ‘refi’ activity under pressure,” Tom Porcelli, a senior economist at RBC Capital Markets in New York, said before the report. “That removes a source of what some had hoped would be an added kicker to consumer spending.”

Rates began rising in May on concern increases in government borrowing to finance the record budget gap will prompt investors to seek higher yields, and Federal Reserve efforts to revive the economy will unleash inflation. Higher costs stunted a rush to lower mortgage payments as Americans tried to cope with the highest jobless rate in 25 years.

Homeowners and prospective buyers are also being thwarted by signs that the housing market isn’t improving. U.S. home prices may fall another 14 percent before reaching a bottom as an increase in unemployment offsets lower prices, Deutsche Bank AG said in a report this week.

Further Price Declines

“Affordability is no longer the driving issue in the housing market, and we believe prices still have a ways to fall in many areas before home prices reach their trough,” Deutsche Bank analysts led by Karen Weaver wrote in the report. “The bottom is getting closer, but we are not there yet.”

The biggest price declines are likely to occur in the New York and Orange County, California, metropolitan areas, Deutsche Bank said.

Rates are rising as President Barack Obama and Federal Reserve Chairman Ben S. Bernanke are trying to spur a housing recovery. Obama has pledged to spend $275 billion to help keep as many as 9 million Americans in their homes and stem the rise of foreclosures. His measures also include a tax break of as much as $8,000 for first-time homebuyers that wouldn’t require repayment.

The Fed said in March it would purchase as much as $1.25 trillion in securities from mortgage-buyers Fannie Mae and Freddie Mac to help drive borrowing costs lower.

Refinancing Gauge

Obama said yesterday U.S. unemployment may reach 10 percent and he’s expected to create a new agency to oversee consumer financial products, such as mortgages and credit cards.

The mortgage bankers’ refinancing gauge decreased to 1,998.1 from 2,605.7 the previous week, today’s report showed. The purchase index dropped for the first time in a month, falling to 261.2 last week from 270.7.

The share of applicants seeking to refinance loans fell to 54.1 percent of total applications last week from 59.4 percent.

The average rate on a 30-year fixed-rate loan fell to 5.50 percent, the first decrease in a month, from 5.57 percent the prior week, when it reached its highest level since November.

Still, at the current rate, monthly borrowing costs for each $100,000 of a loan would be $567.79, or about $72 less than the same week a year earlier, when the rate was 6.62 percent.

The average rate on a 15-year fixed mortgage fell to 4.99 percent from 5.10 percent the prior week. The rate on a one-year adjustable mortgage decreased to 6.54 percent from 6.75 percent last week.

Housing starts jumped more than forecast in May, adding to evidence the worst housing slump in 70 years is abating, figures from the Commerce Department showed yesterday.

The Washington-based Mortgage Bankers Association’s loan survey, compiled every week, covers about half of all U.S. retail residential mortgage originations.

To contact the reporter on this story: Bob Willis in Washington at Bwillis@bloomberg.net

Last Updated: June 17, 2009 08:53 EDT