MBA: Economic slowdown to precede return to growthMortgagePress.comrefinance originations, purchase originations, credit shock, higher energy costs Economic growth will continue to slow through the rest of 2007 but should return to near normal growth during the second half of 2008 and into 2009, according to the latest economic forecast released by the Mortgage Bankers Association (MBA). Total originations should decline another 18 percent next year, as both purchase and refi originations drop. Total originations will drop an additional six percent in 2009 from 2008, as the five-percent increase in purchase originations partially offsets a projected 18-percent decline in refi originations. "We have not yet seen fully the impact of the credit shock to the U.S. and world economies, and the severity of that impact will depend on how long it takes for the markets to return to normal functioning and where credit spreads ultimately settle," said Doug Duncan, MBA chief economist and senior vice president of research and business development. In his general session presentation of MBA's 94th Annual Convention & Expo in Boston, Duncan said, "Among the other uncertainties we face are the impact of sharply higher energy costs, the impact on inflation from higher import prices due to the falling dollar and the impact of uncertainty over the tax policies coming out of Washington. The underlying fundamentals of the economy, however, should be strong enough to get us past this period, so that economic growth should return to normal levels by the second half of 2008. "In terms of housing, we expect 2008 sales to be below 2007 levels until late 2008, but given the over-supply of homes in a number of markets, any significant increase in homebuilding is probably years off. "The drag on GDP growth from the housing sector is being at least partially offset by strength from international trade. During the last four quarters, residential investment in constant dollars fell by $97 billion, while net exports rose by $53 billion. Strength from the external sector will surely continue given robust growth abroad, a declining dollar and the impact of slower growth at home moderating the rise of imports." "If the funds rate [was] reduced another 25 basis points at the October policy meeting, that may [have been] the last move needed to keep the economy on a moderate growth track. Growth, however, seems likely to remain at or somewhat below the economy's long-term growth potential, obviating the need to the Fed to reverse course and raise interest rates next year. "The rates on fixed-rate mortgages are now at 6.4 percent. We expect long-term rates to rise to 6.6 percent by the beginning of 2008." The following are key points of the latest MBA forecast: -The MBA expects housing starts and home sales to reach bottom in the second and the third quarter of next year, respectively. -Total existing home sales for 2007 will decline by about 12 percent from 2006 to 5.72 million units. Sales will decline further by about 10 percent in 2008 before picking up by five percent in 2009. -New home sales will decline by 22 percent from 2006 to 819,000 units. The MBA expects an additional decline of 10 percent in 2008. For all of 2009, the MBA expects new home sales to rise by about six percent. -Home prices for new and existing homes are expected to decline this year, with median prices falling about two percent. Prices should decline at a similar rate in 2008 before flattening out in 2009. -Residential purchase mortgage originations will decline about 15 percent in 2007, to $1.18 trillion, from $1.40 trillion in 2006. Given projected declines in sales and prices for all of 2008, purchase origination should fall by 15 percent to $1 trillion in 2008. The MBA expects purchase originations to rise about five percent in 2009, as home sales and home prices pick up. -Refinance originations will also decline about 15 percent to $1.13 trillion in 2007 from $1.33 trillion in 2006. A significant amount of loans have faced or will face their resets this year and next year. The tightening lending standards will significantly curtail activity in the sub-prime segment of the market. The MBA believes, however, that recent and future Federal Reserve actions will help restore liquidity to financial markets, which will help support refi activity in the prime market in the coming quarters. Nevertheless, as mortgage rates edge up modestly with the stronger economy and increased demand for funds in 2008 and 2009, refi activity will decline by about 22 percent in 2008 from 2007 and about 18 percent in 2009 from 2008. -Total mortgage production will be down about nearly 15 percent to $2.31 trillion this year from $2.73 trillion in 2006. Total originations should decline another 18 percent next year, as both purchase and refi originations drop. The MBA projects that total originations will drop an additional six percent in 2009 from 2008, as the 5-percent increase in purchase originations partially offsets a projected 18-percent decline in refi originations. For more information, visit www.mbaa.org.