Dec. 13 (Bloomberg) -- Mortgage applications in the U.S. jumped last week to the highest level in more than a year as lower mortgage rates spurred home purchases and refinancing.

The Mortgage Bankers Association's index of applications to buy a home or refinance an existing loan rose 11.4 percent to 721.2, the highest since October 2005. The increase followed an 8.1 percent rise in the prior week.

Tumbling mortgage rates and cheaper homes are spurring housing demand, driving applications for loans to purchase real estate to a 10-month high. The data suggest the ``substantial'' weakening of the housing market the Federal Reserve cited in a statement yesterday is nearing an end.

``The end is in sight,'' Doug Duncan, chief economist of the mortgage bankers group, said in an interview. ``There's a series of things that seem to be indicating the worst is over,'' he said, citing shrinking inventory of unsold homes and a stabilization in the rate of new-home sales.

The Mortgage Bankers Association's purchase index rose 8.7 percent last week to 463.8, the second-highest level this year, from 426.6. The measure of refinancing increased 15.8 percent to 2304.4, the highest since September 2005, from 1989.7.

A separate report today showed retail sales rose more than forecast in November. The 1 percent increase was the first in four months, according to the Commerce Department. Sales excluding motor vehicles rose by the most since January.

Fed Rate Decision

Fed policy makers yesterday voted to keep their benchmark interest rate at 5.25 percent for a fourth straight meeting, and noted a ``mixed'' economic performance with inflation risks still at hand.

``Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market,'' the members of the Fed's Open Market Committee said. ``Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters.''

Economists have differing opinions as to when the housing slump will end. The National Association of Realtors, the industry's largest trade group, said this week that sales of previously owned homes will gain in the first three months of 2007, snapping five consecutive quarterly declines.

David Berson, chief economist of Fannie Mae, the largest mortgage buyer, doesn't expect a housing market rebound until the second quarter of 2008, according to his latest forecast, issued Nov. 15. Frank Nothaft, chief economist of Freddie Mac, the No. 2 mortgage buyer, last week called for a turnaround in next year's fourth quarter.

Refinance applications made up 52.6 percent of total applications last week, the most since April 2004, today's report showed.

Lower Rates, Refinancing

Some homeowners have been refinancing out of adjustable rates to lock in low fixed rates. Adjustable-rate mortgages accounted for 25 percent of all applications last week.

The share of foreclosures on adjustable-rate mortgages rose to a four-year high in the third quarter, the MBA also reported today. Surging home prices during the five-year housing boom spurred borrowers to choose riskier adjustable loans to afford real estate, said Duncan.

For all loans, both adjustable and fixed-rate, the percentage entering foreclosure rose to 0.46 in the third quarter, the highest since the last three months of 2004.

The average rate on the 30-year fixed mortgage rose to 6.02 percent last week from 5.98 percent in the week ended Dec. 8. The rate has fallen from a high this year of 6.86 percent, reached in June.

Treasury Yields

Mortgage rates from banks and lenders are based on Treasury yields, which have been declining since June. The yield on the 10-year Treasury note fell to 4.54 percent on Sept. 25, the lowest since February.

At the current rate, borrowing costs for each $100,000 of a loan would be $600.84 a month, about $55 less than in June. The rate on a 15-year mortgage rose to 5.75 percent from 5.66 percent. The one-year adjustable rate fell to 5.76 percent from 5.79 percent.

The National Association of Realtors said on Dec. 11 that sales of previously-owned homes will grow at an annual rate of 6.29 million in the first quarter, the first gain in five quarters. New-home sales, which make up about 15 percent of the market, won't rise until the last three months of next year, the group said.

`Last Chance'

``We have seen mortgage rates come down a little bit over the last month or so and that simply exacerbates the lollygag effect of people deciding to jump into the housing market thinking it's the last chance to get low rates,'' said Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ in New York. ``The fundamental indicators of a slowing housing market remain regardless of applications.''

Some mortgage companies continue to see weaker housing. The real estate market hasn't yet bottomed out, Wells Fargo & Co. Chief Executive Officer Richard Kovacevich said yesterday in an interview. The company, the nation's biggest lender to homebuilders, expects the housing market decline to end by ``late spring.'' About a fifth of the 375 metropolitan statistical areas in the country have had home price decreases of 20 percent, he said.

``It's pretty ugly at the moment,'' Kovacevich said. Home prices are ``really down much more'' than recent economic reports suggest, he said, citing the company's internal data.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

Last Updated: December 13, 2006 14:34 EST