U.S. mortgage applications rose for a second straight week, driven by a jump in demand for home refinancing loans as interest rates tumbled, data from an industry group showed on Wednesday.

However, demand for home purchase loans, an early indicator of home sales, fell to its lowest level since late-May. The drop does not bode well for the hard-hit U.S. housing market, which is plagued by a huge supply and demand imbalance amid mounting foreclosures.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended July 10 increased 4.3 percent to 514.4.

Diane M. Ramirez, President of Halstead Property in New York, said confidence is the driving factor behind home sales and when interest rates on mortgages moved higher in late-May and early June it spooked some potential home buyers.

During that time we saw a noticeable drop in the number of people attending our open houses, she said.

It is all about confidence right now and not the level of interest rates on mortgages because, quite honestly, anything below 6 percent is extremely attractive, she said.

Indeed, with the U.S. unemployment rate at 9.5 percent, its highest in nearly 26 years, many potential home buyers who have lost or who fear they may lose their jobs are opting to stay sidelined even though home affordability has improved significantly.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.05 percent, down 0.29 percentage point from the previous week, the lowest since the week ended May 22, but higher than the all-time low of 4.61 percent set in the week ended March 27. The survey has been conducted weekly since 1990.

Interest rates, however, were well below year-ago levels of 6.22 percent.

Treasury yields, which are linked to mortgage rates, have fallen recently, with mortgage rates responding in kind.

Mortgage rates, however, remained above 5 percent for a seventh straight week. Experts say mortgage rates at 5 percent and below are what is necessary to make a significant impact on home loan demand.

The MBA's seasonally adjusted purchase index fell 9.4 percent to 258.8, the lowest reading since the week ended May 22.

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

WEEKLY REFINANCING ACTIVITY JUMPS

Halstead's Ramirez said home owners seeking to refinance their existing home loans tend to react quickly to shifts in interest rates on mortgages.

When you are seeking to buy a home, it is not as much of a driving factor, she said.

The Mortgage Bankers seasonally adjusted index of refinancing applications increased 17.7 percent to 2,009.4.

The refinance share of applications increased to 54.9 percent from 48.4 percent the previous week, but significantly lower than the peak of 85.3 percent in the week ended January 9. The adjustable-rate mortgage share of activity increased to 5.0 percent in the latest week, up from 4.4 percent the previous week.

The U.S. housing market is in the worst downturn since the Great Depression and its impact has rippled through the recession-hit economy, as well as the rest of the world. Economists contend that the economy might not emerge from its slump unless the housing market stabilizes.

The housing sector, however, has been showing some signs of stabilization, with sales rising and home price declines moderating in many regions of the country.

We are probably at or near a bottom in the Manhattan market, Ramirez said.

It seems like the worst is behind it, she said.

The U.S. government has embarked on an aggressive plan to bring mortgage rates down to levels that will spur demand and help the hard-hit housing market begin to recover.

The Federal Reserve has set a goal to buy up to $1.25 trillion of agency MBS, $300 billion of Treasuries and $200 billion of agency debt in 2009. The purchases are part of efforts to lower borrowing costs.

Fixed 15-year mortgage rates averaged 4.59 percent, down from 4.83 percent the previous week. Rates on one-year ARMs decreased to 6.47 percent from 6.58 percent.

Mortgage