The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity rose 2.3 percent for the week ended December 31 and dipped 3.9 percent in the prior week.

The index has been dragged lower since October by applications to refinance loans, as a spike in interest rates reduced incentives for the homeowners that can qualify under today's tight credit standards. The MBA expects total loan originations will drop to $967 billion this year, down 36 percent from 2010 and less than half that of 2009.

Fixed 30-year mortgage rates jumped to 4.93 percent in the week ending Dec. 24, the highest since May 7, before ending the year at 4.82 percent, the MBA said. The rate is three-quarters of a percentage point higher since early October, as reports of solid consumer spending, and expectations of government and Federal Reserve stimulus plans lifted 2011 outlooks.

Relatively soft application volume follows other recent data points that suggest the U.S. housing market may be on the verge of another downturn. Single-family home prices in October dropped for the fourth straight month, according to the latest Standard & Poor's Case-Shiller index, and analysts are predicting more declines under the weight of foreclosures.

However, housing may draw some demand if recent economic strength gains momentum. The combination of economic recovery and relatively low interest rates has helped boost pending sales of previously-owned homes more than expected in November, the National Association of Realtors said last week.

Broken down, the MBA's seasonally adjusted index of refinancing applications index rose 3.9 percent in the latest week but fell 7.2 percent for the week ended December 24. The index of loans earmarked for home purchases fell 0.8 percent and rose 3.1 percent in those weeks.