The Mortgage Bankers Association's index of applications to buy a home or refinance a loan increased to 652 from 636.7 the prior week. The group's purchase index rose 2.1 percent to 420.2, and its refinancing gauge moved up 2.7 percent.

Rising applications likely overstate Americans' willingness to buy a home and do little to ease concern that the industry slump is deepening, economists said. Borrowing restrictions are discouraging buyers, and foreclosures on subprime mortgages are adding to the real estate glut, damping the outlook for growth.

``Weak actual home sales and high inventories of unsold new homes suggest that home construction will continue to be a significant drag on overall economic activity,'' said Steven Wood, president of Insight Economics LLC in Danville, California.

The mortgage bankers' purchase index rose last week from 411.4 the previous week. The refinancing index increased to 2003.2 from 1950.4 the prior week.

Most economists agree the applications report exaggerates demand because it only includes retail lenders, which have probably seen an increase in business as many wholesale brokers closed their doors. Also, it counts all applications, even those that are ultimately rejected, and some borrowers submit multiple applications.

Average Rate Rises

The average rate on a 30-year fixed loan increased to 6.40 percent last week from 6.32 percent, today's report showed. At the current rate, monthly borrowing costs for each $100,000 of a loan would be about $625, or $8 more than a year earlier.

The average rate on a 15-year fixed mortgage rose to 6.03 percent from 5.95 percent, while the rate on a one-year adjustable mortgage fell to 6.15 percent from 6.21 percent.

Applications to refinance loans made up 46.2 percent of the total, up from 46 percent the prior week.

The group's fixed-rate mortgage index gained 2.7 percent and its measure of adjustable-rate mortgages increased 0.6 percent.

Residential real estate is going through a second leg down after concerns over subprime mortgage defaults caused credit markets to seize up in August, and loans have remained harder to get since then.

New York-based CreditSights Inc. forecasts that the glut of unsold homes may jump 27 percent to 6.5 million, and about 940,000 homes could go on the market within the next year as a result of subprime foreclosures.

In addition, falling home prices are making it tougher for owners to refinance loans just as more interest-only and adjustable-rate mortgages are resetting to higher rates, economists said. Consumers may curb their spending because they have less cash from refinancing.

Company reports this week reflected the distress in housing-related businesses. Foxtons, a discount real estate agency that pioneered selling homes at a 3 percent commission, filed for bankruptcy protection.

St. Joe Co., Florida's largest private landowner, said it plans to eliminate more than 75 percent of its workforce, sell about 100,000 acres of land and scrap its dividend.

The Washington-based Mortgage Bankers Association's loan survey, compiled every week since 1990, covers about half of all U.S. retail residential mortgage originations.

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