New mortgages in the United States are expected to drop to $1.85 trillion a year by 2006 as fewer borrowers refinance their home loans, a U.S. mortgage industry group said Wednesday.

But the drop, after refinancings hit a record high last year amid historically low mortgage rates, will be offset by healthy, albeit slowing, housing sales over the next several years, the Mortgage Bankers Association said.

"The job market will steadily get stronger even in the presence of sustained high levels of productivity growth, resulting in continued strength in home purchase activity," Doug Duncan, the group's chief economist, said in a statement.

The jobless rate should slip to 5.4 percent by the end of 2004 and hold steady about 5.3 percent in 2005 and 2006.

Robust home sales and refinancings were vital in keeping the U.S. economy afloat when it was struck by persistent low growth.

Mortgage originations will total $2.57 trillion in 2004, down from the all-time peak of $3.8 trillion set in 2003, according to the Washington-based group. New mortgage supply will fall to $1.96 trillion in 2005 and $1.85 trillion in 2006, it said.

The sales of existing homes are forecast to slip 1.7 percent in 2004 to 5.99 million units from the record high of 6.10 million units in 2003 and fall an additional 6.8 percent in 2005, the group said.

It also said sales of new homes will rise by 0.7 percent to a record 1.095 million units this year before falling by 10 percent in 2005 and another 1 percent in 2006.

When asked about the divergence between new and existing home sales during a teleconference, Duncan said buyers of new homes tend to have higher incomes than average buyers of existing homes. They are also less sensitive to moderate rate increases than average existing home buyers.

Existing home prices are forecast to rise 4.5 percent this year and new home prices by 5.5 percent. Prices for existing and new prices should increase about 4 percent in 2005 and 2006, the association said.

Interest rates on 30-year fixed mortgage are expected to average 5.8 percent at the end of the year, down 5.9 percent at the end of 2003. The average 30-year rate is expected to rise to 6.2 percent in 2005 and 6.9 percent in 2006, the group said.

The group's latest forecast did not include this week's rise in Treasury yields, benchmarks for U.S. mortgage rates, in response to unexpectedly strong retail sales and inflation data, Duncan said.

On Wednesday, the Labor Department (search) said the consumer price index rose 0.5 percent in March, higher than the 0.3 percent rise analysts had expected. The CPI "core rate," which factors out volatile food and energy prices, climbed 0.4 percent, the biggest increase in nearly 2-1/2 years.

The Federal Reserve (search) could raise short-term interest rates as early as June, if price increases and job growth continue their March booming pace and consumer spending remains at its robust level over the next several months, according to Duncan.

Source MBAA

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