NEW YORK - Applications for U.S. home loans slid last week despite the lowest mortgage rates in more than three months, the Mortgage Bankers Association said on Wednesday, suggesting a long haul before housing recovers.

Punishing winter weather has likely chipped away at demand, but high unemployment and underemployment are stifling the housing market even with federal tax incentives still in play.

The industry group's market index, which includes purchase and refinance applications, fell a seasonally adjusted 1.9 percent to a three-week low despite improving borrowing costs.

Average 30-year mortgage rates dropped 0.10 percentage point to 4.91 percent in a steady descent from a recent peak of 5.18 percent at the turn of the year. Rates have not been lower since early December.

Housing is bouncing along a somewhat jagged bottom after a three-year plummet, said Keith Hembre, chief economist at First American Funds in Minneapolis.

Groundbreaking for new homes fell in February and permits to build dropped for a second straight month. The market still faces a glut of foreclosed properties that is seen dragging out a housing recovery. Read more at [ID:nN16245361].

The Federal Reserve on Tuesday noted that housing starts have been flat at a depressed level.

The housing crisis, which helped drag the U.S. into recession, is also one of the reasons the Fed reaffirmed its commitment to keep interest rates low for an extended period. See the Fed's policy statement at [ID:nTRT000377].

The MBA's index of refinancing applications dropped 1.7 percent last week and its purchase loan demand index fell 2.3 percent.

After a burst of demand last year, the continuation of the tax credit was supposed to spur continued sales into 2010 and it just doesn't seem at this point to have done that, said Dan Egan, president of the Massachusetts Credit Union League, in Marlborough, Massachusetts.

Time is running out for consumers to qualify for the $8,000 first-time buyer tax credit or $6,500 move-up credit. Contracts need to be signed by April 30 and loans closed by June 30.

Harsh weather across a broad swath of the country is partly to blame for slow sales, and the warmer spring months typically mean more home shopping.

But in 2009 mortgage originations rose about 4.3 percent at credit unions nationally whereas so far this year the rise is nearer to 1 percent, Egan said.

Though improved from October's 26-1/2 year peak, unemployment remains just below 10 percent.

Not only are people unemployed but people are concerned about future employment, he said. Until that really gets addressed I don't think we'll see a significant rise in mortgage applications.

Mortgage