U.S. mortgage applications fell for the first time in four weeks, driven by a drop in demand for home refinancing loans as interest rates climbed, data from an industry group showed on Wednesday.

Applications for loans to buy a home, an early indicator of sales, were flat. Lack of interest for purchase loans does not bode well for the hard-hit U.S. housing market, which has otherwise been showing signs of stabilization.

The U.S. Mortgage Bankers Association said its seasonally adjusted index of mortgage applications USMGM=ECI, which includes both purchase and refinance loans, for the week ended July 24 decreased 6.3 percent to 495.4.

Jeffrey Fisher, professor of real estate and director of the Benecki Center for Real Estate Studies at the Indiana University Kelley School of Business, said the housing market has stabilized, but believes interest rates on mortgages are very important right now and are likely to rise.

The rise in interest rates on mortgages is likely going to be accompanied by a rise in inflation and that has historically been good for housing, he said.

Construction costs are also likely to start rising again if the market in China continues to recover and their demand for materials increases, he said.

This will put upward pressure on home prices, he said.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.36 percent, up 0.05 percentage point from the previous week, and sharply 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 6.46 percent.

But, mortgage rates remained above 5.0 percent for a ninth straight week. Some experts say mortgage rates at 5.0 percent and below are what is necessary to make a significant impact on home loan demand.

And 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.

The MBA's seasonally adjusted purchase index USMGPI=ECI was unchanged at 262.0.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 2.6 percent.

WEEKLY REFINANCING ACTIVITY SLIDES

The Mortgage Bankers seasonally adjusted index of refinancing applications USMGR=ECI decreased 10.9 percent to 1,862.1. The refinance share of applications decreased to 52.6 percent from 55.5 percent the previous week, significantly lower than the peak of 85.3 percent in the week ended Jan. 9. The adjustable-rate mortgage share of activity increased to 5.5 percent in the latest week, up from 4.8 percent the previous week.

Professor Fisher said the main threat to the housing market is some unforeseen event that derails the economic recovery.

The economy is recovering, but fragile, he said.

But, as consumer confidence increases and banks start making more loans we should see continued strength in the housing market, he said.

The U.S. housing market has suffered 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.

The housing market, however, has been showing signs of stabilization, with sales rising and home price declines moderating in many regions of the country. In fact, home prices in some regions have risen.

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 Fed's efforts however, have been offset by rising Treasury yields, which are linked to mortgage rates.

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 4.75 percent, down from 4.80 percent the previous week. Rates on one-year ARMs increased to 6.66 percent from 6.50 percent.

China U.S. Mortgage