The number of American mortgage applications declined 10.6% last week, reflecting the biggest decrease in home purchases since October 2003, a private group’s survey found. Refinancing also fell.

The drop to 605.7 from 677.4 in the Mortgage Bankers Association’s measure of applications to buy a home or refinance an existing mortgage was the biggest since May 14. The group’s gauge of purchases slumped 13.7%, the largest drop since October 10, 2003, to 417.3 from 483.8.

Home-buying waned even as 30-year mortgage rates declined, suggesting the rise in prices last year may be impeding sales.

The mortgage bankers’ group said the average 30-year fixed rate fell to 5.67% last week from 5.72%. It was a record-low 4.99% in June 2003.

“This will be the first year since before the recession that the housing market doesn’t set a new record,” said the chief financial economist at Bank of Tokyo-Mitsubishi Ltd. in New York, Chris Rupkey. “The housing market’s been in overdrive, and this is the year it’s going to settle down to a sustainable pace.”

Some economists said the decline reflected the difficulty the mortgage bankers’ group has in adjusting the data for seasonal events, such as Christmas and other holidays. In the last full week of 2003, the mortgage index fell 9.1% before rebounding 4.5% a week later.

“The drop in the index was related to inadequate seasonal adjustment for the holidays,” said an economist at JP Morgan Chase & Co. in New York, Jayanth Nazareth.

The mortgage bankers’ measure of refinancing decreased 5.7% to 1701.3, the lowest level since the week ended August 6, from 1803.9.

The Washington-based National Association of Realtors expects 7.51 million homes to be sold this year, down from the record 7.76 million forecast for 2004.

The Office of Federal Housing Enterprise Oversight’s latest report showed a 13% increase in home prices in the third quarter from the same three months in 2003, the biggest increase since 1979. At the same time, the rate of American home ownership was 69%, close to a record.

Price appreciation probably will slow to 8% this year from 9.7% in 2004, according to Freddie Mac, the second largest mortgage buyer. Over the last 20 years, the average American price gain has been 4.5%, said an economist at the National Association of Realtors, Lawrence Yun, last month.

The chief economist at the San Francisco investment bank ThinkEquity Partners, Mat Johnson, said high home prices are now starting to deter buyers.

“We’ve reached the point at which higher housing prices are becoming even more important to consumers than mortgage prices because they’ve risen so fast,” Mr. Johnson said. “They’re becoming prohibitive and it’s crowding some people out of the market.”

The chief executive officer of community Lending Inc., Darryl Fry, said reduced refinancing applications resulted in a 20% decline in his firm’s annual revenue last year, which totaled $80 million. Refinancing accounted for 38% of the loans issued by the Morgan Hill, Calif.-based mortgage lender in 2004. It accounted for 58% in 2003.

“There is a gradual slowing of applications of all types,” Mr. Fry said yesterday. “People are being more influenced by prices, which are up, than by mortgage rates, which have basically been flat.”

Mortgage rates are lower now than they were when Federal Reserve policy makers began raising their target rate for overnight bank lending in June of last year. In the last week of June 2003, the average 30-year mortgage rate was 6.21%.At the current rate of 5.67%,the monthly cost for each $100,000 borrowed is $578.50.When mortgage rates were at their lowest, monthly borrowing costs were $549.73.

The National Association of Realtors expects 30-year fixed mortgage rates to rise this year as high as 6.5%.

An economist at the financial research firm IDEAglobal in New York, Wesley Beal, said borrowing costs won’t take a “big bite” out of the market until 30-year fixed mortgage rates increase 2 percentage points.

“That’s where the Fed is headed,” Mr. Beal said. “It kind of gives you pause, but right now the Fed and the interest rate scenario really doesn’t indicate that borrowing costs will climb high enough to hurt housing this year.”