Three year outlook sees growth in fixed rates, overall economy
By MortgageDaily.com staff
7/15/2003

A leading industry analysis has concluded that mortgage lenders will encounter ever stiffer competition in the next two years, as the economic recovery takes hold.

The Mortgage Bankers Association of America (MBA) on Monday released its Macroeconomic and Housing Finance Outlook 2003-2005. Senior vice president and chief economist Douglas G. Duncan concluded that as market conditions cause mortgage originations to fall, the spread between 30-year fixed rate mortgages and the 10-year Treasury, which has for the last five years averaged 190 basis points, will narrow by 25-30 basis points.

As the spreads narrow, causing "fierce competition," "there will be consolidation in the mortgage food chain both among lenders and their business partners as competition increases when volumes drop," the report said. The trend should continue through 2005, according to the report.

Fixed-term interest rates will rise based on confidence in economic recovery rather than a move by the Federal Reserve Board, the report said. Though the Fed will likely begin raising rates in mid-2004, the report said, its effect will be neutral through 2006.

MBA predicted the 30-year fixed rate to close out 2004 at 6.1 percent and 2005 at 6.7 percent, with the 10-year Treasury closing 2004 at 4.5 percent and 2005 at 5.0 percent, according to the outlook.

For 2003, the prediction is an average 30-year rate of 5.7 percent, the lowest annual average rate since the 1960s, the outlook said. Low rates will push 2003 into an all-time record for originations; $3.4 trillion, according to the forecast. Duncan expects to see a 43 percent dropoff in 2004, with originations totaling $1.94 trillion, with refinances comprising the bulk of the dropoff.

Actual loan volume for purchases is expected to increase in each of the three years in the forecast. 2003 is expected to be a the third record year in a row for sales, with 6.825 million homes changing hands, the outlook said. Of this number, 1.021 million will be newly constructed houses.

Median housing prices are expected to rise in 2003; 5.4 percent for existing houses and 3.3 percent for newly constructed ones.

Housing starts are expected to slow over 2004 and 2005, the outlook said. The report predicted that the housing market would "return to a role of sharing leadership in economic growth rather than being the flagbearer for the entire economy.

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