Dip in refinancing drags down mortgage applications

— -- Mortgage applications slid to the lowest level since mid-March last week as demand for refinancing slowed, according to a report Wednesday that suggests a recovery in the housing market is still on shaky ground.

The drop in refinancing comes despite historically low interest rates and a continued decline in home prices.

The volume of mortgage loan applications for buying and refinancing homes fell 8.6% in the week ended May 8 from a week earlier, according to the Mortgage Bankers Association's index.

Refinancing activity fell from its peak in mid-April, sliding 11.2% from a week earlier and hitting its lowest level since mid-February. Refinancing represented about 72% of activity last week, down from more than 74% a week earlier.

"The bottom line is that we're in a touch-and-go economy. It's not going to be a smooth path to recovery," says Brian Bethune at IHS Global Insight. "We're going to get fits and starts, because consumers and households are still shell-shocked. It's still unstable."

The housing market is struggling with an oversupply of homes for sale, and the bloated inventory is being exacerbated by a high rate of foreclosures.

Foreclosure filings in April jumped 32% from the same month last year, according to RealtyTrac.

Interest rates remain low. The average rate on 30-year mortgages slipped 0.03 percentage points to 4.76%, the Mortgage Bankers Association said. It was 5.14% in early March.

However, consumers are wary because of mounting unemployment and lower wages.

Credit standards remain tight. Some potential home buyers say they can't qualify or afford the down payments now required by banks.

"Right now, we have no choice but to wait because most of these financing lenders are looking for buyers to throw down as much as 20%, and I simply cannot clear out my bank account to buy a new home," says Tony Keller, 31, a vice president at a public relations firm. He is moving from Colorado Springs to Chicago this fall but putting off buying a home.

Some economists are hopeful that a decision this week by the Federal Housing Administration to allow first-time home buyers to apply a tax credit of up to $8,000 to their down payment could help spur sales.

First-time buyers made up half of all purchasers in the first quarter, according to the National Association of Realtors.

"It's a positive inducement no matter how you look at it," Bethune says.