Economic forecast projects robust growth

Total residential mortgage production in 2005 will be $2.78 trillion, the third-biggest year behind 2003 and 2002.

“At about 3.5 percent, economic growth will be solid this year despite a drag from sharply higher energy prices, hurricane-related impacts and a widening trade deficit,” said Doug Duncan, MBA chief economist and senior vice president for research and business development. “Housing will continue to be a major contributor to economic growth, and we expect the string of record-high home sales to continue for the fifth consecutive year in 2005.”

During a panel discussion at MBA’s 92nd Annual Convention & Expo in Orlando, Duncan said that the labor market will remain strong nationally, even with the devastating impacts on labor markets in the hurricane-ravaged Gulf areas.

The Fed is expected to continue its tightening through next year to ensure that inflation remains under control.

“Long-term rates, albeit rising, will remain relatively low, supporting residential and commercial real estate finance activity,” Duncan added. “Long-term rates have risen by about 40 (to) 50 basis points from their lows immediately after Hurricane Katrina.”

It is expected that the Fed is now more concerned about inflation and will be more aggressive in raising rates than previously expected, with further increases in long-term yields of 20 to 30 basis points by the end of 2005, and another 40 to 50 basis points during 2006.

“The 30-year fixed-rate mortgage yield should reach 6.8 percent by the end of 2007. Even with this moderate increase from the current level, interest rates will still be quite low by historical standards,” Duncan said.

Among the key points of the MBA forecast:

• Real GDP growth will average about 3.5 percent in 2005 through mid-2008.

• The unemployment rate will decline from the current level of 5.1 percent to 5 percent by the end of 2006 and to 4.9 percent by the end of 2007. Despite significant job losses due to Hurricane Katrina, the economy outside of the Gulf area remains healthy. Some job creation should also offset some of the job losses, as rebuilding activity is under way. MBA expects the labor market to add an average of about 190,000 jobs monthly over the next 12 months.

• Fixed-rate mortgages are expected to average about 6.65 percent in the fourth quarter of 2006 and 6.75 percent during the fourth quarter of 2007.

• The yield curve has flattened significantly since the beginning of the year, with the spread between fixed and adjustable rate mortgages declining by nearly 50 basis points to about 120 basis points by mid-October. The share of adjustable rate mortgages has declined this year as well and MBA projects that the decline in the share will continue through the middle of next year. The share is projected to rise again in late 2006 and 2008 as a significant number of hybrid adjustable rate mortgages reach their reset and are refinanced.

• Total existing-home sales for 2005 will increase by 3.7 percent relative to 2004 to a new record level in 2005, but sales will pull back by about 3.5 percent in 2006 and decline by another 5 percent in 2007. New-home sales will rise by nearly 5 percent to a record high in 2005, and will slip by 3 percent in 2006 and about another 4 percent in 2007.

• Existing home price appreciation is expected to be very strong this year, with median existing home prices rising to 10.8 percent during 2005. Increases in new home prices are projected to be significantly slower, with median new home price gains dropping to 3.8 percent. Price gains in 2006 and 2007 are expected to continue to be healthy but at a more sustainable pace of about 5 percent for all homes.

• Residential mortgage originations for purchase loans will reach $1.49 trillion in 2005 and will edge down to $1.47 trillion in 2006 and $1.46 trillion in 2007. Residential refinance loans will total $1.28 trillion in 2005 and then decline to $785 billion in 2006 and $689 billion in 2007.

There are both upside and downside risks to this forecast. On the upside, rebuilding could boost growth next year by more than projected. On the downside, higher oil prices, higher core inflation or more aggressive tightening by the Fed could result in a slower economic growth than projected.

MBA revised its estimate of total mortgage originations in 2004 to reflect newly released data from the Home Mortgage Disclosure Act and the MBA Survey of Mortgage Originations.

[[In-content Ad]]