U.S. mortgage applications nudged higher last week, reflecting increased demand for home purchase loans even as interest rates trekked higher, data from an industry group showed on Wednesday.

If demand for purchase loans, a tentative early indicator of home sales, continues to climb it will bode well for the hard-hit U.S. housing market, which remains highly vulnerable to setbacks and heavily reliant on government intervention.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended March 5 increased 0.5 percent.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 0.8 percent.

Bill Emerson, CEO of Quicken Loans in Livonia, Michigan, said the lofty level of homes either on the market for sale or about to hit the market through foreclosures and short sales are the biggest threat to the U.S. housing market.

This inventory will pressure prices, so many people are sidelined right now, waiting for prices to fall further, he said.

The MBA's seasonally adjusted purchase index increased 5.7 percent, while its seasonally adjusted index of refinancing applications decreased 1.5 percent.

While many people have already refinanced over the past year, there is still a huge amount of borrowers who can benefit from it, he said.

Many mortgages, however, are under water, he said. This negative equity has been one of the biggest banes of homeowners, making many unqualified for home loan refinancing and preventing some from selling. Borrowers in negative equity, meaning they owe more on their mortgage than their home is currently worth, are more prone to defaults and foreclosures.

Stricter lending standards, higher fees, and declining incomes have also made it tougher on borrowers. Unemployment and underemployment too -- the Labor Department last week said the U.S. unemployment rate held steady at 9.7 percent in February.

The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.01 percent, up 0.06 percentage point from the previous week and above the all-time low of 4.61 percent set in the week ended March 27, 2009. The survey has been conducted weekly since 1990.

Mortgage rates are expected to rise when the Federal Reserve -- the U.S. central bank -- stops buying mortgage-related securities at the end of March.

The Fed will likely take a step back to see if the private sector steps up and starts purchasing the bonds, Emerson said. If they do not, mortgage rates could move significantly higher.

The lowest mortgage rates in decades and high affordability helped the hard-hit U.S. housing market find some footing in 2009 after a three-year slump. Recent data on new and existing home sales, however, say the sector is still struggling.

It is a slippery slope right now in the housing market, he said.

The MBA said the refinance share of mortgage activity decreased to 67.2 percent from 69.1 percent the previous week. The adjustable-rate mortgage, or ARM, share of activity increased to 5.1 percent from 4.8 percent, the highest since November 2009.

The MBA said fixed 15-year mortgage rates averaged 4.32 percent, up from 4.27 percent the previous week. Rates on one-year ARMs increased to 6.80 percent from 6.77 percent.

(Editing by Chizu Nomiyama)

Michigan Mortgage