Sept. 3 (Bloomberg) -- Mortgage rates for 30-year fixed U.S. home loans fell this week, reducing borrowing costs for buyers amid signs the U.S. housing market is stabilizing.

The average 30-year rate fell to 5.08 percent from 5.14 percent, mortgage buyer Freddie Mac of McLean, Virginia, said today in a statement. The 15-year rate was 4.54 percent.

“The drop in mortgage rates is probably a function of the longer-term Treasuries coming down a bit,” said George Mokrzan, senior economist at Huntington National Bank in Columbus, Ohio. “That’s a good thing. That should help to further support housing markets and give a little bit more support to that early stage of recovery.”

Falling home prices, a government tax credit for first-time buyers and low mortgage rates are bolstering demand for housing. New home sales and pending home sales gained more than forecast in July and sales of existing homes rose to the highest in almost two years.

The Federal Reserve set out last year to encourage lower mortgage rates by pledging to buy bonds backed by home loans. It increased the size of the program to $1.25 trillion in March. Those bond purchases from Fannie Mae, Freddie Mac and Ginnie Mae brought down yields on mortgage-backed securities and allowed lenders to reduce rates on new loans while still selling the securities backed by them at a profit.

The plan helped drive mortgage rates to a record low 4.78 percent twice in April.

Fed Purchases

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan fell 2.2 percent to 554.1 in the week ended Aug. 28 from 566.4 in the prior week. The group’s refinancing gauge declined 3.1 percent, while the index of purchases fell 1 percent.

The central bank disclosed last week that it bought a greater-than-average amount of mortgage bonds for two weeks in a row, following a period of reduced purchases.

Net purchases totaled $25.4 billion in the week ended Aug. 26, compared with a weekly average of $23.3 billion since the Fed began the initiative in January, according to data posted on the New York Fed’s Web site and compiled by Bloomberg. Before Aug. 19, the central bank’s acquisitions were below $23 billion for six straight weeks.

The increased pace of purchases may not last, depending on the nation’s overall economic performance. Richmond Fed President Jeffrey Lacker said in a speech on Aug. 27 that the central bank may not need to buy the full $1.25 trillion.

New-home sales increased 9.6 percent in July, the most since February 2005, to a 433,000 annual pace, figures from the Commerce Department showed on Aug. 26. The number of houses on the market dropped to the lowest level in 16 years.

Existing home sales advanced 7.2 percent to a 5.24 million annual rate in July, the most since August 2007, the National Association of Realtors said Aug. 21. The gain was the biggest since records began in 1999.

To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net.

Last Updated: September 3, 2009 10:35 EDT