The Mortgage Bankers Association (MBA) today released its second-quarter update to its long-term macroeconomic and real estate finance forecast for the period 2004 through 2006. MBA is projecting strong economic growth through 2006, with gross domestic product (GDP) growth rates near or exceeding 4 percent each year.

"The U.S. economy is gaining strength in a sustainable, broad-based manner in 2004, as we have anticipated, and looks to continue that growth over the three-year forecast period. 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," said Doug Duncan, MBA's chief economist and senior vice president.

"Even with these strong growth expectations, interest rate increases will be modest due to continued expectations of low inflation. The 10-year Treasury yield is expected to end 2004 at around 4.4 percent, implying a 30-year fixed-rate mortgage rate of around 6 percent. With inflation under control in the presence of a growing economy, the 30-year mortgage rate will rise to slightly more than 7 percent by the end of the three-year forecast period. From a historical perspective, these are very modest interest rate increases for the level of economic growth we are expecting, and should cause few adjustment problems for the housing industry," Duncan said.

The key points of the latest MBA forecast are the following:

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Real GDP growth will average 4.6 percent during 2004, 3.9 percent in 2005 and 3.8 percent in 2006.
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The unemployment rate will decline from the current level of about 5.7 percent to 5.3 percent by the end of 2006.
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The 10-year Treasury rate will rise to an average of 4.3 percent by the fourth quarter of 2004, 5.0 percent during the fourth quarter of 2005, and average 5.4 percent during 2006. Mortgage rates will follow a similar pattern, although the spread between mortgage and Treasury rates is expected to tighten to an average of about 150 basis points.
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Mortgage originations will be down from an all-time record high of $3.8 trillion in 2003, but will hit $2.57 trillion in 2004, $1.96 trillion in 2005 and $1.85 trillion in 2006.
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The bulk of the drop-off in total loan origination volume will be in refinancing. Originations for purchasing homes are expected to be $1.38 trillion in 2004, $1.37 trillion in 2005 and $1.42 trillion in 2006, all up from the record $1.27 trillion in 2003.
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Existing-home sales will come off 2003 record levels and fall by 1.7 percent in 2004 and fall by an additional 6.8 percent in 2005, thus remaining at very high levels by historical standards. New-home sales will rise by 0.7 percent in 2004 before falling by 10 percent in 2005 and another 1 percent in 2006.
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Home-price growth is expected to moderate, with existing-home prices increasing 4.5 percent during 2004 and new-home prices increasing 5.5 percent. Price increases in 2005 and 2006 are expected to be in the 4 percent range.

Source Freddie Mac

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