Mortgage applications in the U.S. fell for the first time in five weeks as refinancing cooled.

The Mortgage Bankers Association’s index of loan applications dropped 4 percent in the week ended May 27. The group’s refinancing index declined 5.7 percent and the purchase gauge was unchanged.

Falling home prices are keeping more buyers on the sidelines while making it harder for homeowners to refinance current mortgages. Unemployment at 9 percent and the prospect of more foreclosures in the pipeline mean housing will take time to recover.

“Nobody wants to buy an asset they think will go down in value,” Neil Dutta, an economist at Bank of America Merrill Lynch in New York, said before the report. “The only people who can refinance are great credits and you’re only talking about a very small sliver of the market.”

The average rate on a 30-year fixed loan decreased last week to 4.58 percent, the lowest since the end of November, from the prior week’s 4.69 percent, today’s report showed. Borrowing costs reached 4.21 percent in October, the lowest since the group’s records began in 1990.

The average rate on a 15-year fixed mortgage was unchanged at 3.78 percent.

The share of applicants seeking to refinance a loan declined to 65.7 percent last week from 66.8 percent the prior week.

Fewer Sales

Recent reports showed the housing market remained depressed as the broader economy slowed.

Pending sales of previously owned homes plunged 12 percent in April from the prior month, the National Association of Realtors said last week. The gauge measures contract signings, which typically lead closings by one to two months, a sign existing purchases will slow.

Sales of previously owned homes, based on closings, fell 0.8 percent in April to a 5.05 million rate, with demand for distressed properties accounting for 37 percent of the total, NAR said May 19.

Home prices in 20 U.S. cities dropped in March to the lowest level since 2003, showing housing remains mired in a slump almost two years into the economic recovery.

The S&P/Case-Shiller index of property values in 20 cities fell 3.6 percent from March 2010, the biggest year-over-year decline since November 2009, the group said yesterday in New York.

More Inventory

The overhang of unsold housing inventory will probably remain an issue for builders and buyers alike. CoreLogic Inc. in March estimated about 1.8 million homes were more than 90 days delinquent, in foreclosure or bank-owned, a so-called “shadow inventory” set to add to the unsold supply of 3.87 million previously owned homes on the market at the end of April.

Builders project demand will remain depressed into next year, Jeffrey Mezger, president and chief executive officer of Los Angeles-based KB Home, told a housing conference in New York on May 11.

Any housing recovery will “be slower than in the past,” Mezger said, adding that he expected sales to “bump along for the next 18 months.”