2007 originations down 14 percent from
Economic growth will continue to slow through the rest of 2006 but should return to near normal growth during 2007 and 2008, according to the latest economic forecast released by the Mortgage Bankers Association (MBA). Total residential mortgage production in 2006 will be $2.46 trillion, the fifth highest level ever, but will drop another 14 percent in 2007 to $2.1 trillion and remain unchanged at that level in 2008.
"Despite sluggish growth, largely due to declining residential investment and auto production in the second half of this year, we are optimistic about a rebound in 2007," said Doug Duncan, MBA chief economist and senior vice president for research and business development. "Long term interest rates have remained low in the face of rising short term rates, equity prices have risen nearly 20 percent, capital expenditures remain strong, the trade sector has turned from a big drag on growth to a modest stimulus and energy prices have dropped sharply."
In his general session presentation at MBA's 93rd Annual Convention & Expo in Chicago, Duncan said, "... although the labor market has recently weakened, the market is still quite healthy. Employment continues to expand moderately, with payrolls increasing at an average monthly pace of 120,000 over the past three months. Several measures of core inflation have trended higher in recent months, but we are optimistic that they will decelerate slowly to below the upper end of the Fed's comfort zone.
"The financial markets perceive that the Fed is now done with the tightening cycle and now expect an easing at some point in 2007. Although we expect core inflation to moderate going forward, we believe that the currently elevated rate will keep the Fed from lowering interest rates despite signs of slowing economic activity. We expect that the Fed will keep the fed funds rate steady at the current 5.25 percent through 2008.
"The rates on fixed rate mortgages are now below 6.4 percent. We expect long term rates to remain low this year, helping to cushion the slowing in residential housing activity that has been underway for more than a year. Commercial real estate activity should remain a bright spot in the economy.
"The 30 year fixed rate mortgage yield should trend modestly higher over the course of the next two years, reaching 6.8 percent by the end of 2008. Thus, interest rates will still be quite low by historical standards."
The following are the key points of the latest MBA forecast:
-Real GDP growth will average about 3.1 percent in 2006, three
percent in 2007 and 3.2 percent in 2008.
-The unemployment rate will increase from the current level of 4.6 percent to 4.9 percent by the end of 2006 and to 5.2 percent by mid 2007 and remain there through 2008. It is expected that the labor market will add an average of about 90,000 100,000 jobs monthly over the next 12 months.
-Fixed mortgage rates should remain at about today's 6.3 6.4 percent through the rest of the year. Rates are expected to rise to about 6.7 percent by the end of 2007 and to about 6.8 percent by the end of 2008.
-The yield curve will remain inverted, with the fed funds rate and the one year Treasury yield exceeding the 10 year Treasury yield.
-The yield spread between fixed and adjustable rate mortgages has remained at its lowest levels in more than five years. The share of adjustable rate mortgages (which only includes conventional loans for home purchase) has declined from 30 percent at the beginning of the year to 20 percent in August, according to the Federal Housing Finance Board. It is projected that the decline in the share will continue through the forecast period, reaching about 19 percent by the end of 2008. The ARM share from the MBA weekly survey of mortgage applications (which includes both purchase and refi loans) has shown a much more modest decline, however. The ARM share remained elevated at nearly 27 percent of the number of loans by mid October, compared with about 30 percent at the beginning of the year.
-Total existing home sales for 2006 will decline by about nine percent relative to a record level in 2005 and will pull back by about another eight percent in 2007. New home sales will decline by nearly 18 percent from a record high in 2005 but will slip by about eight percent in 2007. Both new and existing home sales will increase modestly in 2008.
-Existing home price appreciation is expected to slow significantly this year, with median price gains decelerating to about 2.5 percent. Median new home price gains are projected to moderate to about one percent. Price gains for both existing and new homes in 2007 are expected to be similar to those in 2006. Home price appreciation should strengthen modestly in 2008.
-Residential mortgage originations for purchase loans will reach $1.39 trillion in 2006 and will edge down to $1.32 trillion in 2007. Residential refinance loans will total $1.07 trillion in 2006 and then decline to $807 billion in 2007. For 2008, both purchase and refi originations should remain relatively flat to their 2007 levels.
-Total residential mortgage production in 2006 will be $2.46 trillion, the fifth highest level ever, declining by about 19 percent from an estimated $3.03 trillion in 2005 (the second highest level ever). Total mortgage originations should decline an additional 14 percent to $2.12 trillion in 2007 and should remain flat in 2008.
-The risks to the forecast lie mainly on the downside. The housing sector could deteriorate more than projected, with sharper declines in single family housing starts and home sales, resulting in sustained declining year over year home prices. This could lead to a marked slowdown in consumer spending growth. If so, the Fed could start easing to prevent a recession. However, if core inflation remains elevated or even edges higher, the Fed would likely remain on the sideline, increasing the risk of a recession. The MBA believes the probability for this scenario is small.
-The MBA revised its estimate of total mortgage originations in 2005 to reflect newly released data from the Home Mortgage Disclosure Act and the MBA Survey of Mortgage Originations.
For more information, visit www.mbaa.org.