Mortgage applications rose last week, indicating that the slowdown in the housing market may be gentle.

The Mortgage Bankers Association's index of applications to purchase a home or refinance an existing mortgage increased by 7% last week. That is the greatest increase since the end of April. The gauge remains below the same week last year, down by 34%.

Higher borrowing costs have been forecasted to affect the housing industry. After five years of record highs, the downturn in the housing market is expected.

Economists expect job gains and income growth to bring home purchases into the top three highest ever, despite the slowdown forecasts.

"There is still an underlying demand for homes, which should keep the mortgage index from going into freefall," said Chris Rupkey, senior financial economist for Bank of Tokyo-Mitsubishi UFJ Ltd. "The mortgage index has fallen for a few weeks, so it is not surprising to see a bounce in activity this week.

The refinancing index rose by 10.6%, the highest gain in a year. Refinancings remain 50% below last year's levels.

The purchase index rose by 4.8% last week. It is 22% below last June's peak.

The real estate market has been essential to the growth of the U.S. economy in the past five years. It will affect the economy with smaller price gains and higher interest rates curbing the market.

As fewer people take cash-out refinances, consumer spending growth is expected to slow to an average annual rate of 3.2% for 2006, according to a recent Bloomberg News survey.

Homebuilders are calling on Federal Reserve policy makers to end the series of increases in interest rates that began in June 2004. There have been 16 consecutive raises so far, with a 17th expected at the end of the month.

"This is the time for the Fed to pause on rate hikes because we hae some interest-sensitive housing markets that have become vulnerable," said David Lereah, chief economist at the National Association of Realtors.

While the NAR expects housing sales to drop by 6.8% for 2006, it still believes that it will remain the third-strongest year on record for sales.