Nov. 19 (Bloomberg) -- Mortgage applications in the U.S. dropped last week as demand for home-purchase financing slumped to an almost eight-year low.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan fell 6.2 percent to 398.6 for the week ended Nov. 14, from 425 the prior week. The group’s purchase index decreased 13 percent to the lowest level since December 2000.

The prospect of even bigger decreases in property values and stricter lending rules by banks may be scaring away home buyers, indicating the housing slump is likely to enter a fourth year in 2009. The economy may be heading for the worst recession in decades as consumers and business retrench.

“The intensification of economic and financial problems since September has been having a negative effect on home sales,” Abiel Reinhart, an economist at JPMorgan Chase & Co. in New York, said in a note to clients before the report.

The mortgage bankers’ purchase index decreased to 248.5, today’s report showed. The refinancing gauge climbed 2.6 percent to 1,281.2.

Applications declined even as most mortgage rates fell. The average rate on a 30-year fixed loan dropped to 6.16 percent, the lowest level in over a month, from 6.24 percent the prior week.

At the current 30-year rate, monthly borrowing costs for each $100,000 of a loan would be about $610, up $42 from mid- January, when the rate reached a three-year low of 5.5 percent.

More Refinancing

The share of applicants seeking to refinance loans increased to 49.9 percent from 45.1 percent of total applications.

Confidence among U.S. homebuilders in November dropped to the lowest level since record-keeping began in 1985, according to a report yesterday from the National Association of Home Builders/Wells Fargo. The index of builder confidence decreased to 9, lower than forecast, from 14 in October. A reading less than 50 means most respondents view conditions as poor.

A Commerce Department report today is projected to show that builders in October began work on 780,000 homes at an annual rate, the fewest since record-keeping began in 1959, according to the median estimate in a Bloomberg survey. Building permits probably fell to the lowest level since 1981.

Today’s report also showed the average rate on a 15-year fixed mortgage decreased to 5.87 percent from 5.90 percent. The rate on a one-year adjustable mortgage rose to 6.80 percent from 6.77 percent the prior week.

The Washington-based Mortgage Bankers Association’s loan survey, compiled every week since 1990, 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: November 19, 2008 07:00 EST