* US mortgage applications climb, mortgage rates fall
* Rate drop drives refinancing applications up
* Current account gap narrows in third quarter
* Commercial real estate will decline deep into next year (Adds commercial real estate, new mortgage rates, late markets)
By Burton Frierson
NEW YORK, Dec 17 (Reuters) - The moribund U.S. mortgage market showed signs of life last week even before the Fed announced unconventional steps to revive the economy, while a key trade measure improved in the third quarter.
The Mortgage Bankers Association said U.S. mortgage applications climbed last week as 30-year mortgage rates fell near the lowest on their records, rare signs of hope after a year-long recession caused by a bursting housing bubble.
Other data on Wednesday showed the current account deficit, the broadest measure of the U.S. trade shortfall with the rest of the world, narrowed more than expected in the third quarter.
The data came a day after the Federal Reserve cut
short-term interest rates to near zero. This unprecedented step
sent the dollar to 13-1/2-year lows against the Japanese yen
The narrower current account deficit may assuage some concerns about the dollar, which has come under intense pressure after the Fed's decision, but it was also evidence of the extremely poor state of the world's largest economy.
"Overall, the deficit is still huge, 4.8 percent of gross domestic product, but it should continue to decline as the crunch in import demand offsets the dramatic downshift in exports," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
The Fed cut its target for overnight interest rates to a record-low zero to 0.25 percent on Tuesday and said it would employ "all available tools" to dispel a recession that is on track to be the longest since the Great Depression.
The Fed move weighed heavier on financial markets than the data. The dollar tumbled against broad range of currencies <.DXY>. The euro was up about 1.7 percent against the dollar.
U.S. stocks were down slightly due to ongoing worries about the economy and weak financial results.
Long-term U.S. government debt prices rallied as investors scrambled for returns after the Fed radically altered the interest rate environment by pushing short-term rates to rock bottom.
Fresh data showed the mortgage market continued the momentum supplied by the Fed. Average interest rates on a 30-year fixed mortgage plunged to 4.70 percent from 5.01 percent on Tuesday, according to Zillow Mortgage Marketplace.
Additionally, requests for refinancing are up 230 percent month-over-month, Zillow said. Zillow was not alone in observing a drop in mortgage rates.
Mortgage rates are on track to end the week at the lowest level in at least 46 years, according to Keith Gumbinger, vice president of HSH, a mortgage information provider in Pompton Plains, New Jersey.
Any good cheer in mortgages was tempered by troubling news elsewhere in the property market. The U.S. commercial real estate market will continue to decline deep into next year, the National Association of Realtors said.
"QUITE A BOON"
The mortgage data showed the market was already benefiting from previous promises of interventions by the Fed.
The Mortgage Bankers Association said its application activity index rose 2.9 percent to a seasonally adjusted 841.4 in the week ended Dec. 12.
Average 30-year fixed mortgage rates tumbled last week to 5.18 percent, the lowest since June 2003, the MBA said, and barely above the all-time low of 4.99 percent for the series, which dates back to 1990.
The rate drop propelled refinancing applications higher.
The Fed's rate cut, and its pledge to buy hundreds of billions of dollars of mortgage bonds to help lower loan rates and stimulate housing, should stoke the refinancing engine.
"It doesn't solve the problem for people who owe more than their home is worth, but for the significant majority who are able to refinance, it is quite a boon," said Bob Walters, chief economist at Quicken Loans in Livonia, Michigan.
The U.S. current account deficit narrowed in the third quarter to $174.1 billion from a downwardly revised $180.9 billion in the second.
The deficit in the third quarter was 4.8 percent of gross domestic product, down from 5.1 percent in the second. (Reporting by Doug Palmer in Washington, and Lynn Adler and Ellen Freilich in New York)