U.S. mortgage applications rose despite a jump in borrowing costs last week, but still bounced around the year's lows with unemployment fears depressing demand.

The Mortgage Bankers Association's total loan applications index rose by a seasonally adjusted 2.8 percent to 528.9 last week, even as 30-year mortgage rates rose by about 1/4 percentage point to 5.31 percent.

The measure of requests to buy homes and refinance loans was up from a seven-month low of 444.8 three weeks earlier but still less than half the level seen during the spring, when mortgage rates sank to record lows.

The primary negatives right now are the high rate of unemployment and general uncertainty about the future path of the economy, which make people reluctant to buy, said David Stiff, chief economist at Fiserv in Cambridge, Massachusetts, which produces the S&P/Case-Shiller and other price indexes.

Home affordability has vastly improved with mortgage rates about 1-1/4 percentage less than a year ago and home prices, based on the S&P/Case-Shiller gauges, plunging an average 32 percent in the past three years.

But the fear of unemployment, with the highest rate of job loss in almost 26 years, is keeping many potential buyers unwilling or unable to commit to such a major purchase, economists said.

The MBA's index of applications to purchase homes inched up by 1.3 percent last week to 262.1, and has been fairly range-bound for months.

Federal Reserve Chairman Ben Bernanke told Congress on Tuesday that unemployment is apt to stay uncomfortably high into 2011 and could drain consumer confidence.

A peak-to-trough average price slump of 39 percent is likely, with losses as great as 75 percent in the bubble markets, according to Fiserv.

The prospect of more price erosion keeps many buyers at bay, waiting for better bargains.

The one silver lining in rapidly declining prices at least is that we're falling back in line with household income levels, Stiff said.

Home prices in more than half of the markets are within 25 percent of levels seen before the housing bubble, he said.

That still seems like a large amount of overvaluation, but during the bubble peak in many of the most expensive markets, prices were 100 percent to 150 percent higher relative to income than they were in 2000, Stiff noted.

The MBA's index of refinance applications gained 4.0 percent last week to 2,089.7, a one-month high. At the year's highs, the refinance measure was more than triple last week's level.

The average 30-year loan rate jumped 0.26 percentage point last week to 5.31 percent, heading closer to this year's high of 5.57 percent in June than to the record low 4.61 percent in March.

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