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MBA Releases Long-Term Forecast

July 15, 2004

Sees Interest rates rising

WASHINGTON, D.C. - The Mortgage Bankers Association (MBA) today released its quarterly update of its Long-Term Mortgage Finance Forecast. MBA is projecting $2.5 trillion in mortgage originations in 2004. Refinancings will total $1.1 trillion, while mortgages for home purchases will make up 58 percent of total originations, or $1.4 trillion.

 Related Links:
Mortgage Finance Forecast [pdf] Economic Forecast [pdf]

MBA projects strong growth in domestic production, averaging 4.4 percent in 2004. MBA's Senior Vice President and Chief Economist, Doug Duncan, said, "June's employment data, showing slower jobs growth, does not mean the economy is faltering. Consumer spending remains strong and business expenditures are strengthening, supported by rising corporate profits. The slowing pace of growth to a sustainable level is to be expected after the very strong growth during the second half of 2003." Employment gains are expected to remain at a monthly average level of around 250,000.

The Federal Reserve is anticipated to continue to raise short-term interest rates in the subsequent Federal Open Market Committee (FOMC) meetings. MBA expects the federal funds rate to be at 2 percent to 2.25 percent at year-end. Duncan said, "The future path of inflation is uncertain. The MBA forecast reflects an expected decline from the current rate of inflation. If inflation does not recede, then future interest rates will be modestly higher."

Looking beyond 2004, MBA sees a slowing of the market as interest rates continue to rise modestly due to the continued economic expansion. Gross domestic product (GDP) growth of just under 4 percent annually over the three-year horizon will cause the Fed to continue its measured pace of increasing short-term interest rates. This will eventually lead to a flattening of the yield curve at a higher level of interest rates, and the adjustable-rate mortgage (ARM) share of mortgages will fall, as will total loans. In addition, MBA expects total originations to average around $1.8 trillion for the 2005-2007 time period.

In spite of the recent volatility in bond rates, interest rates are still expected to rise. MBA projects that the 10-year Treasury rate will increase from 4.6 percent in the second quarter to 5.0 percent in the fourth quarter, averaging 4.6 percent for the year. Mortgage rates will increase correspondingly, with the average 30-year fixed mortgage rate increasing to 6.5 percent in the fourth quarter from 6.1 percent in the first quarter.

MBA forecasts home sales in 2004 will surpass last year's volume of 7.2 million units by 3.5 percent, before slowing in 2005 and beyond. Home sales are expected to drop by nearly 11 percent in 2005 from the historic levels of 2004 and remain relatively flat at that level for the remainder of the forecast period. Home prices, while slowing, will continue to rise based on strong demand-side fundamentals. "This is a housing market which is moving from historic levels to strong levels over the three-year time horizon," Duncan said.

Source: MBA



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