By Julie Haviv
NEW YORK Oct 7 (Reuters) - U.S. mortgage applications surged last week to their highest since mid-May as consumers sought to take advantage of the lowest interest rates in months, data from an industry group showed on Wednesday.
The Mortgage Bankers Association said rates on 30-year fixed-rate mortgages, the most widely used loan, were below 5 percent for a third straight week, reaching a four-month low. Demand for home refinancing loans was the highest since mid-May.
Applications to buy a home, a tentative early indicator of sales, climbed to the highest since early January. The trend bodes well for the hard-hit U.S. housing market, which has been showing signs of stabilization.
The MBA said its seasonally adjusted index of mortgage applications USMGM=ECI, which includes both purchase and refinance loans, for the week to Oct. 2 increased 16.4 percent to 756.3, the highest since the week ended May 22.
"The residential housing market appears to be stabilizing due to lower mortgage rates," said Alan Rosenbaum, president of Guardhill Financial, a New York-based mortgage banker and brokerage company.
"The affordability factor, which takes into consideration both price and mortgage rates, has been very positive of late," he added.
Low mortgage rates, high affordability and the federal $8,000 tax credit for first-time home buyers -- part of the government's $787 billion stimulus bill -- have helped pave the way for stabilization.
But with the tax credit set to expire on Nov. 30 and distressed properties making up a high proportion of sales, the recent uptick may mask uncertainty over the long-term outlook.
Leif Thomsen, CEO of Mortgage Master in Walpole, Massachusetts, said an extension of this tax credit is not only warranted at this point of time, but critical.
"We are getting close to crunch time with the tax credit and if we don't extend it whatever recovery we've had to this point is going to fall flat on its face," he said.
"It is a very interesting and crucial time in America right now for economic recovery and a lot will hinge on whether the government decides to extend the tax credit or not," he said.
Rising unemployment is another obstacle. The U.S. Labor Department last week said the jobless rate reached a 26-year high of 9.8 percent in September.
Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.89 percent, down 0.05 percentage point from the previous week and the lowest since the week ended May 22.
The rate remained above the all-time low of 4.61 percent set in the week ended March 27. The survey has been conducted weekly since 1990. Nevertheless, interest rates were well below the year-ago level of 5.99 percent.
The MBA's seasonally adjusted purchase index USMGPI=ECI rose 13.2 percent to 306.1, its highest since the week to Jan. 2. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 4.2 percent.
The MBA's seasonally adjusted index of refinancing applications USMGR=ECI increased 18.2 percent to 3,377.1, with the index at its highest since the week ended May 22.
The refinance share of applications rose to 66.3 percent from 65.3 percent the previous week, but remained significantly lower than the peak of 85.3 percent in the week to Jan. 9. The adjustable-rate mortgage share of activity fell to 6.1 percent, down from 6.2 percent the prior week.
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 market, however, has shown signs of stabilization, with sales rising and price declines moderating in many regions, while home prices in some areas have risen.
Some analysts, however, say prices may fall again, with a new wave of foreclosures in the pipeline.
Fixed 15-year mortgage rates averaged 4.32 percent, down from 4.34 percent the previous week. Rates on one-year ARMs increased to 6.56 percent from 6.40 percent. (Editing by James Dalgleish)