U.S. mortgage application demand slid to the lowest level since mid-March, driven by a drop in requests to refinance loans even as borrowing costs dipped toward record lows last week, the Mortgage Bankers Association said on Wednesday.

Applications for loans to buy homes rose marginally in the week ended May 8, holding slightly elevated levels in the midst of the keenly watched spring selling season.

U.S. housing continues to stumble in its deepest slump since the Great Depression.

But near record-low mortgage rates and a 30 percent price drop by some measures from the 2006 peak are luring buyers -- mostly those who benefit from a first-time buyer federal tax credit and those secure in their jobs.

The Mortgage Bankers Association said its applications index that includes purchase and refinance loans fell 8.6 percent to a seasonally adjusted 895.6 last week.

While refinance applications fell 11.2 percent to 4,588.6, the lowest since mid-February, the trade group's purchase loan index climbed 0.5 percent to 265.7. The last time purchase requests were higher was in the first week of April.

Borrowing costs bumped around near record lows.

The average 30-year mortgage rate slipped 0.03 percentage point to 4.76 percent and hovered slightly above the low of 4.61 percent set in late March.

A year ago, the rate was more than a percentage point higher at 5.82 percent.

Refinances have dominated the mortgage application figures steadily over the last three or four months. We're still doing such overwhelming refinance application volume, but the number of units that we are seeing on the purchase side is encouraging, said Paul Anastos, vice president of Mortgage Master, Inc, an independent lender in Walpole, Massachusetts.

Still, low rates have not yet been enough to overcome fears of job loss with unemployment at its highest rate in more than a quarter century.

I don't feel like at this point it's so much rate driven, Anastos said in an interview on Tuesday. If you look at the prospects of buying, the rates make housing very affordable. To me, it's more of an issue of consumer confidence.

Refinancings represented about 72 percent of all mortgage applications last week, the trade group said.

Many potential buyers are still grappling with weighty concerns.

Will I have a job, will I be able to make payments, has the economy bottomed out?, Anastos said are key questions borrowers are asking. I see a slight improvement year over year if I look at it globally, but I haven't seen enough to really let me feel like we're out of the woods.

A recovery in the U.S. housing market could be as much as two years away, Sheila Bair, chairman of the Federal Deposit Insurance Corp, said in remarks prepared for a National Association of Realtors gathering.

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