Mortgage Bankers Association releases economic forecast

MBA is projecting continued strong economic growth of 3.5 percent for 2006, with moderate, below-trend growth of 3.3 percent in 2007.

Total residential mortgage production in 2006 will be $2.24 trillion, the fifth-biggest year on record, but a 19.5 percent decline compared to 2005.

“Housing will decline modestly from the fifth consecutive record year in 2005 but will remain robust historically. Home price appreciation rates will moderate compared to recent years,” said Doug Duncan, MBA chief economist and senior vice president for research and business development, in a news release.

State of real estate

During MBA's 2006 State of the Real Estate Industry press briefing, Duncan said that the labor market remains strong nationally, but the devastating effects of the hurricanes in the Gulf areas continue to negatively affect that region. Core inflation should edge higher this year but will remain contained.

Elevated energy prices are expected to pass through to underlying inflation but only modestly.

The Fed is expected to continue tightening rates through March to ensure that inflation remains under control, and MBA expects the Fed to halt the tightening cycle after those two additional increases.

Since the Federal Open Market Committee meeting in December, long-term interest rates have moderated as a result of speculation that the tightening phase may be ending soon.

MBA expects that the 30-year fixed-rate mortgage yield should rise moderately to about 6.4 percent by the end of this year and through 2007.

“Long-term rates, albeit rising, will remain relatively low, supporting residential and commercial real estate finance activity,” Duncan said.

With below-trend economic growth expected in 2007 due to slowed consumption growth, coupled with contained inflation, MBA anticipates that the Fed will lower the Fed funds rate in late 2007.

Three-year forecast

Among the key points in the latest MBA forecast:

o Fixed mortgage rates will rise moderately to about 6.4 percent by the end of this year and through 2007 and decline to around 6.1 percent by the end of 2008.

o MBA expects to continue to see a flat yield curve, as the spread between fixed and adjustable rate mortgages has narrowed significantly over the past year.

o Total existing-home sales will decrease by 4.7 percent this year, compared to the record in 2005, and will decline another 4.4 percent in 2007 but should remain flat in 2008. New-home sales for this year will decline by 4.3 percent from a record high in 2005, and will slip by another 4.9 percent in 2007; they should remain flat for 2008.

o Total residential mortgage production will decline by 19.5 percent to $2.24 trillion in 2006 (the fifth-highest level ever) from an estimate of $2.79 trillion in 2005 (the third-highest level ever).

o Residential mortgage originations for purchase loans will edge down slightly from an estimated $1.49 trillion in 2005 to $1.46 trillion this year. Purchase originations should decline further, to $1.45 trillion in 2007. MBA expects declining mortgage rates in 2008 to boost purchase originations to $1.54 trillion in 2008.

o Residential refinance loans will decline by nearly 40 percent from 2005 to $784 billion in 2006 and should declined further to $685 billion in 2007. Lower rates will spur refinance activity, increasing refinance originations to $886 billion in 2008.