The Mortgage Bankers Association (MBA) released its three-year economic forecast update. 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 relative to 2005.

"We expect economic growth to remain solid in 2006, but we will begin to see below-trend growth for 2007,” said Doug Duncan, MBA chief economist and senior vice president for research and business development. “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.”

During MBA’s 2006 State of the Real Estate Industry press briefing, Duncan said that the labor market remains strong nationally, however the devastating impacts of the hurricanes in the Gulf areas continue to negatively impact that region. Core inflation should edge higher this year, but will remain contained. Elevated energy prices are expected to pass though to underlying inflation only modestly. The Fed is expected to continue tightening rates through March of this year to ensure that inflation remains under control, and we expect the Fed to halt the tightening cycle after those two additional increases.

Since the Federal Open Market Committee meeting in December 2005, long-term interest rates have moderated as a result of speculation that the tightening phase may be ending soon. We expect the yields on 10-year Treasury notes to gradually rise to 4.8 percent by the end of 2006 and remain at that level through 2007. Additionally, the 30-year fixed-rate mortgage yield should rise moderately to about 6.4 percent by the end of 2006 and through 2007.

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

With below-trend economic growth in 2007, due to slowed consumption growth, and coupled with contained inflation, we expect the Fed will lower the Fed funds rate in late 2007. After that point, we expect both the 10-year yield and the 30-year fixed rates to decline to 4.6 percent and 6.1 percent, respectively, by the end of 2008.

Following are the key points of the latest MBA forecast:

• Real GDP growth will be at 3.5 percent in 2006, 3.3 percent in 2007 and then increase to the trend rate of about 3.6 percent growth in 2008.
  
• 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.
  
• We will continue to see a flat yield curve, as the spread between fixed and adjustable rate mortgages has narrowed significantly over the past year. The share of adjustable rate mortgages has declined over the past year as well and we project the decline in the share will continue through 2008.
  
• Total existing-home sales will decrease by 4.7 percent in 2006 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 2006 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.
  
• Existing home price appreciation is expected to moderate significantly in 2006, with median existing home prices increasing 6.6 percent in 2006. Increases in new home prices are projected to be slower, with median new home price gains expected to be 5 percent in 2006. Price gains in 2007 and 2008 are expected to continue to be healthy but at a more sustainable pace of about 4-5 percent for both existing and new homes.
  
• 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).
  
• Residential mortgage originations for purchase loans will edge down slightly from an estimated $1.49 trillion in 2005 to $1.46 trillion in 2006. Purchase originations should decline further, to $1.45 trillion in 2007. We expect declining mortgage rates in 2008 to boost purchase originations to $1.54 trillion in 2008.
  
• 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. Refinance activity from 2006 forward will also benefit from a significant number of hybrid adjustable rate mortgages reaching their first rate reset and are refinanced either into another ARM or fixed-rate product.

Source: MBA