NEW YORK - U.S. mortgage rates retreated below 5 percent last week, propping demand for home loans after purchase applications sank to a nearly 13-year low the prior week, Mortgage Bankers Association data showed on Wednesday.

February's volatile swings in housing demand comes on the heels of a steep January sales slump, blamed mainly on unusually harsh winter weather.

The industry group's market index, which measures requests for loans to buy homes and refinance, rose by a seasonally adjusted 14.6 percent in the week ended February 26 to the highest level since mid-December.

Purchase applications increased 9 percent while refinancing requests jumped 17.2 percent last week as average 30-year mortgage rates fell 0.08 percentage point to 4.95 percent.

Mortgage applications rebounded last week, particularly refis, as rates dropped back below 5 percent, Michael Fratantoni, vice president of research and economics at MBA, said in a statement. Purchase activity remains subdued, with application volumes remaining within the narrow range seen in the last few months.

Refinancing loans represented about 69 percent of all applications last week.

In January, sales of existing homes sank by more than 7 percent to the weakest level since June and new home sales set a record low.

Snow blasted most U.S. states, but the erratic sales pace in recent months also stems from the fits and starts of the $8,000 first-time home buyer tax credit.

The credit pulled sales forward last year as buyers raced to beat its November expiration. The incentive was ultimately extended, and expanded with a $6,500 move-up buyer credit, spurring a second wave of demand after a brief lull.

To get these incentives qualified borrowers need to sign contracts by the end of April and close loans by the end of June.

Still, U.S. housing is expected to stagnate at best as it emerges from a three-year crash that helped propel the U.S. economy into recession.

We are seeing positive signs of some form of life, but it is not significant and the recuperation period is going to be significant because these are dramatic declines in housing and employment, said Vickie Lester, president of mortgage servicing at RoundPoint Financial Group in Charlotte, North Carolina.

Unemployment lingers just below 10 percent. Foreclosures are running at a record pace and banks are sitting on stockpiles of repossessed properties yet to be placed on the market.

All of these factors threaten to slice home prices anew.

People are taking jobs in other states and they can't get rid of the property they have, so they're not buying when they get relocated, Lester added. Everybody has had significant property value declines, equity is gone and they can't very easily just go out there and apply for a new mortgage.

About one-quarter of U.S. homeowners with mortgages had negative equity at the end of 2009, owing more on their mortgages than their homes were worth, based on various reports.

The offsetting impact of affordability and distressed inventory could yield a somewhat flattish housing market over the next two years -- a slight decline in 2010 followed by a rebound in 2011, Desmond Macauley, senior strategist at RBS, said on a conference call on Tuesday.

Progress is being made on modifying loan terms for many borrowers in default, and interest rates remain low, but housing is seen unlikely to gain much ground as long as joblessness stays high.

Mortgage