Mortgage rates in the U.S. dropped from a four-month high, reducing borrowing costs as demand for housing improves.

The average rate for a 30-year fixed mortgage was 4.2 percent this week, Freddie Mac said in a statement Thursday. That’s down from 4.23 percent, the highest since early May. The average 15-year rate slipped to 3.36 percent from 3.37 percent, the McLean, Virginia-based mortgage-finance company said.

The housing market is recovering as foreclosures subside and employment growth fuels demand. Sales of new homes in the U.S. surged in August, jumping 18 percent to a 504,000 annualized pace, the highest level since May 2008, Commerce Department figures showed Wednesday.

The increase “suggests that looser credit conditions and strengthening economic activity are finally giving households the confidence to purchase a new home,” Paul Diggle, property economist for Capital Economics Ltd. in London, wrote in a note to clients.

Mortgage rates, which had been little changed for two months, jumped last week amid signs that the economy is strengthening. Federal Reserve policy makers on Sept. 17 reiterated a commitment to keep benchmark interest rates near zero for a “considerable time.”