NEW YORK - Demand for U.S. home loans fell as fixed mortgage rates rose last week in a banking period shortened by the Labor Day holiday, the Mortgage Bankers Association said on Wednesday.

Total applications were nonetheless at one of the highest levels seen since early June, with borrowers still eager to take advantage of the federal first-time home buyer tax credit before the program closes at the end of November.

Borrowing costs stayed relatively low. Average 30-year loan rates rose 0.06 percentage point to 5.08 percent last week, up from the record low 4.61 percent in March, but down from 5.82 percent a year ago, the industry group said.

For a related chart of mortgage rates, right click on the code: aUSMBAMLR and select Related Graph.

The seasonally adjusted mortgage applications index fell 8.6 percent in the week ended September 11 to 592.8, driven by a 10.3 percent drop in its purchase applications index and a 7.4 percent slide in refinancing demand.

These figures were adjusted to account for Labor Day.

Low borrowing costs and the final push for the first-time buyer credit have stirred demand, but the upside is limited by a supply of unsold homes inflated by foreclosures, industry executives and economists said.

We still have a lot of inventory in the marketplace and that is continuing to put pressure on pricing, but pricing has come down to a level that has really opened the marketplace to a lot more buyers, said Tom Kunz, chief executive of Century 2 Real Estate in Parsippany, New Jersey.

But there is not enough momentum from repeat buyers, including those selling homes to move-up to larger ones, to sustain the housing boost from first-time buyers, he said.

We need to stimulate the move-up marketplace because there's too much inventory out there, for first-time buyers to absorb, said Kunz.

The real estate industry is pressing Congress to extend the tax credit to all buyers and increase the size to $15,000 from $8,000. Qualified buyers must close on their loans before November 30 under the current program.

The housing recovery will be constrained by lingering excess supply, Joshua Feinman, chief economist at Deutsche Bank's DB Advisors, said in a report. The scars from this crisis will likely keep households and financial intermediaries cautious for some time.

Federal Reserve Chairman Ben Bernanke on Tuesday said that the worst recession since the Great Depression was probably over, but the recovery would be slow and it would take time to create new jobs. To read story, click on [ID:nN1523355].

That would be good news for housing in that the Fed is expected to keep interest rates low for an extended period to bolster the economy,

But a 26-year high in unemployment and wage cuts have added to the hardships in housing, forcing many homeowners into foreclosure.

 Job loss and underemployment spread the pain in housing from the subprime sector, where borrowers often only could afford initial payments with exotic and risky adjustable-rate loans, to prime borrowers that favor fixed-rate mortgages.

For the first eight months of the year, 69 percent of homeowners who turned to national nonprofit Consumer Credit Counseling Service of Greater Atlanta for foreclosure prevention help had fixed-rate loans. That was up from 53 percent in the same period last year.