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MBA Releases Long Term Economic Forecast

January 16, 2007

he Mortgage Bankers Association (MBA) projects that economic growth in the first half of this year will accelerate from the second half of last year, averaging 3.0 percent in 2007. MBA expects growth to pick up, returning to near trend growth (about 3-1/4 percent) over the course of 2008 and through 2009. MBA also forecasts total residential mortgage production in 2007 to be $2.39 trillion.

“Residential investment is expected to decline further through the first half of 2007 but at a diminishing pace. Economic growth should accelerate later this year to a trend-like pace as the drag from the housing sector wanes,” said Doug Duncan, MBA’s Chief Economist and Senior Vice President for Research and Business Development. “Long-term interest rates have remained historically low following two years of monetary tightening. Consumer spending growth is robust, helped by solid stock market gains, declining oil prices and healthy wage increases. The trade sector has also begun to turn around, contributing to economic growth.”

Duncan continued, “The labor market is still quite healthy. Employment continues to expand, with payrolls increasing at an average monthly pace of 135,000 in the final quarter of last year. Core inflation has trended lower in recent months but is still exceeding the upper-end of the Fed’s comfort zone. We are optimistic that core inflation will continue to decelerate slowly, moving within the comfort zone later this year.”

Duncan expects that the Fed will keep the fed funds rate steady at the current 5.25 percent through the forecast period, as economic growth firms up to a trend pace. Incoming data suggesting that economic activity is gradually improving over the past month has caused the financial market to pare down expectations of an easing in the first half of this year, resulting in an increase in long-term rates.

The rates on fixed-rate mortgages are currently about 6.2 percent. Duncan expects long-term rates to rise modestly this year, helping to cushion the decline in residential housing activity that will continue through at least mid-2007. 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 first half of the year, reaching 6.5 percent by the third quarter and edging up just slightly through 2009. Thus, interest rates will still be quite low by historical standards,” said Duncan.

Following are the key points of the latest MBA forecast:

• Real GDP growth will average about 3.0 percent in 2007, 3.3 percent in 2008 and 3.4 percent in 2009.

• The unemployment rate will increase from the current level of 4.5 percent to 4.9 percent by the end of 2007 and remain around that level through 2009. We expect the labor market to add an average of about 100,000-120,000 jobs monthly over the next 12 months.

• Fixed mortgage rates are expected to rise to about 6.5 percent by the end of 2007 and to remain about that level through the forecast period.

• Total existing-home sales for 2007 will decline by about 7 percent relative to 2006. New-home sales will decline by about 8 percent from 2006. Both home sales are projected to rebound in 2008 by about 3 percent and increase by about 1 percent in 2009.

• Existing home price appreciation is expected to slow significantly over the next three years. Median prices should remain relatively flat for both new and existing homes. Price gains for in 2008 and 2009 are expected to limited to about 2 percent.

• Residential mortgage originations for purchase loans will reach to $1.33 trillion in 2007 and will remain flat in 2008. Residential refinance loans will total $1.06 trillion in 2007 and then decline to $957 billion in 2008. For 2009, purchase originations should edge up slightly while refi originations should decline to about $800 billon.

• Total residential mortgage production in 2007 will be $2.39 trillion -- declining by about 5 percent from an estimated $2.51 trillion in 2006. Total mortgage originations should decline an additional 4 percent to $2.29 trillion in 2008 and drop another 6 percent to $2.15 trillion in 2009.

“There are some downside risks in forecast,” said Duncan. “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 and threaten an economic expansion. 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 recession risks. We believe the probability for this scenario to be small.”

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