U.S. mortgage applications dipped last week, reflecting reduced demand for home purchase loans even as rates on 30-year loans fell to their lowest since December, an industry group said on Wednesday.

The Mortgage Bankers Association's (MBA) seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, decreased 1.2 percent for the week ended February 5.

The MBA said rates on 30-year fixed-rate mortgages, the most widely used loan, fell below 5 percent for the first time since the week ended December 18. Low mortgage rates fueled a slight uptick in demand for home refinancing loans last week, with activity reaching its highest level since the week ended December 11.

A continuation of lackluster demand for home purchase loans would not bode well for the U.S. housing market, which remains highly vulnerable to setbacks and heavily reliant on government intervention.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 3.8 percent.

The lowest mortgage rates in decades and high affordability has helped the hard-hit U.S. housing market find some footing in 2009 after a three-year slump.

The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.94 percent, down 0.07 percentage point from the previous week, the lowest since the week ended Dec 18.

An all-time low of 4.61 percent was set in the week ended March 27, 2009. Interest rates were also below above the year-ago level of 5.19 percent. The survey has been conducted weekly since 1990.

Celia Chen, senior director of housing economics at Moody's Economy.com in West Chester, Pennsylvania, said they expect 30-year fixed rate mortgages to reach 5.50 percent by the middle of the year and just shy of 6 percent by year-end.

The end to the Federal Reserve's purchase of government-sponsored enterprise mortgage-backed securities, combined with slightly stronger inflationary expectations will cause rates to rise, she said.

The Federal Reserve is set to stop buying mortgage-related securities at the end of March. The Fed's agency MBS and agency debt purchase programs, aimed at lowering borrowing costs, will have reached more than $1.4 trillion.

Home prices will fall, probably until the end of the year, Chen said. The large pipeline of distressed properties that may turn into foreclosure sales weigh down the home price outlook.

There is a great deal of uncertainty over how many properties will end up on the market as a foreclosure sale, however, she said.

The housing market faces plenty of obstacles.

In the fourth quarter, one of every five U.S. homeowners owed more on their mortgage than their home was worth, a trend that poses a serious threat to the U.S. housing market's recovery, real estate website Zillow.com said on Wednesday.

The MBA's seasonally adjusted purchase index, a tentative early indicator of home sales, decreased 7.0 percent, while its seasonally adjusted index of refinancing applications increased 1.4 percent.

The refinance share of mortgage activity increased to 69.7 percent of total applications from 69.2 percent the previous week. The adjustable-rate mortgage (ARM) share of activity was 4.5 percent, unchanged from the previous week.

The MBA said fixed 15-year mortgage rates averaged 4.33 percent, unchanged from the previous week. Rates on one-year ARMs decreased to 6.68 percent from 6.70 percent.

(Editing by Jeffrey Benkoe)

Pennsylvania