Higher interest rates continue to eat into the mortgage lending business, according to the latest figures, but the housing industry seems undaunted.

The Mortgage Bankers Association reported Wednesday that mortgage applications fell last week and refinancing stayed at its lowest level in almost two years. The overall application index fell 13.2%, to 310.5, and the index of mortgages for home purchases dropped 13.8%, to 274.1.

The group's seasonally adjusted refinancing index fell 11.3%, to 522.0- the lowest level since the week that ended Sept. 12, 1997, when it was at 498.5.

But the National Association of Home Builders still holds that housing production this year may surpass last year's pace of more than 1.6 million units, though momentum will likely slow late this year and next year.

Earlier this year the industry was on pace to beat last year's production.

U.S. Housing Markets, an industry newsletter published by Meyers Group, reported that builders obtained 12% more single-family housing permits in the first quarter than in the same period last year.

First-quarter housing starts were also up-14% ahead of a year earlier, according to the report.

The Home Builders' chief economist, David Seiders, said though growth in the economy and the housing market is expected to slow, the change will not be abrupt. He estimated the gross domestic product growth for 1999 at 3.5%, compared to 3.9% last year.

As a result, he said, housing production would probably slip to an annual rate of about 1.52 million starts by yearend and 1.5 million by the second quarter of 2000.

David Lereah, chief economist for the Mortgage Bankers Association, agreed that the housing industry would probably shrug off the uptick in rates that has occurred in recent weeks.

"There was an anticipation that the Fed would raise rates two to three weeks before they actually did, and a lot of people jumped off the fence and got mortgages," Mr. Lereah said. "We used up a lot of our pipeline when that happened, but we may see some activity stepping up as rates come back down."

Mr. Lereah said that since the Federal Reserve's Open Market Committee said it would switch to a neutral stance after only one rate hike, interest rates have been edging back down.

"I guess I'm saying that I agree with the home builders," Mr. Lereah said. "Home construction plans are not likely to be affected because of rates."

Freddie Mac's primary mortgage market survey, released Thursday, appeared to support that view.

The 30-year fixed-rate mortgage averaged 7.58% for this week-slightly down from last week's average of 7.65%. A year ago it averaged 6.96%.

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