Housing topping more records in 2005 before downshifting

Mortgage Banking, Dec, 2005

LOOK FOR HOUSING TO REMAIN A MAJOR economic force with record home sales and near-record residential mortgage production expected in 2005 before the market downshifts, even as the Federal Reserve is poised to continue its rate tightening, predicted MBA Chief Economist Doug Duncan.

The message the Fed has conveyed is that if it becomes a choice between allowing inflation to increase and a recession, the Fed will choose recession, Duncan told attendees at MBA's 92nd Annual Convention & Expo in Orlando.

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

Expect 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, Duncan added.

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

MBA's three-year economic forecast calls for robust real economic growth of 3.5 percent this year, 3.6 percent in 2006 and 3.4 percent in 2007.

The unemployment rate will drop to 5 percent for all of 2006 and decline to 4.9 percent by the final quarter of 2007, according to MBA. Despite significant job losses due to Hurricane Katrina, the economy outside the Gulf Region remains healthy, and job creation due to rebuilding should offset some of the hurricane-related job losses, said Duncan.

Total existing-home sales for 2005 will increase by 3.7 percent relative to 2004 to a new record, but sales will pull back by about 3.5 percent in 2006 and continue to decline by another 5 percent in 2007. Meanwhile, new-home sales will also set a record in 2005, rising by nearly 5 percent before slipping by 3 percent in 2006 and by another 4 percent in 2007, forecasted MBA.

Existing-home price appreciation will remain strong through 2005, with median existing-home prices accelerating to 10.8 percent, while new-home price increases will significantly moderate to 3.8 percent. Expect price gains in 2006 and 2007 to continue to be healthy, but at a more sustainable pace of about 5 percent for all homes, said MBA.

Residential mortgage originations for purchase loans will top $1.49 trillion in 2005 before edging 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.

Total residential mortgage production in 2005 will be $2.78 trillion,

the third-highest level ever, according to MBA's forecast.