MBA Releases Long-Term Economic Forecast
|January 26, 2006|
The Mortgage Bankers Association (MBA) released its three-year economic forecast update. MBA is projecting continued strong economic growth of 3.5 percent for 2006, with moderate, below-trend growth of 3.3 percent in 2007. Total residential mortgage production in 2006 will be $2.24 trillion, the fifth-biggest year on record, but a 19.5 percent decline relative to 2005.
"We expect economic growth to remain solid in 2006, but we will begin to see below-trend growth for 2007,” said Doug Duncan, MBA chief economist and senior vice president for research and business development. “Housing will decline modestly from the fifth consecutive record year in 2005, but will remain robust historically. Home price appreciation rates will moderate compared to recent years.”
During MBA’s 2006 State of the Real Estate Industry press briefing, Duncan said that the labor market remains strong nationally, however the devastating impacts of the hurricanes in the Gulf areas continue to negatively impact that region. Core inflation should edge higher this year, but will remain contained. Elevated energy prices are expected to pass though to underlying inflation only modestly. The Fed is expected to continue tightening rates through March of this year to ensure that inflation remains under control, and we expect the Fed to halt the tightening cycle after those two additional increases.
Since the Federal Open Market Committee meeting in December 2005, long-term interest rates have moderated as a result of speculation that the tightening phase may be ending soon. We expect the yields on 10-year Treasury notes to gradually rise to 4.8 percent by the end of 2006 and remain at that level through 2007. Additionally, the 30-year fixed-rate mortgage yield should rise moderately to about 6.4 percent by the end of 2006 and through 2007.
“Long-term rates, albeit rising, will remain relatively low, supporting residential and commercial real estate finance activity,” continued Duncan.
With below-trend economic growth in 2007, due to slowed consumption growth, and coupled with contained inflation, we expect the Fed will lower the Fed funds rate in late 2007. After that point, we expect both the 10-year yield and the 30-year fixed rates to decline to 4.6 percent and 6.1 percent, respectively, by the end of 2008.
Following are the key points of the latest MBA forecast: