SAN FRANCISCO - At the Mortgage Bankers Association's 91st Annual Convention & Expo, economists forecasted only a modest rise in interest rates despite continued economic expansion. With rates staying at low levels, the purchase market is expected to remain robust in the coming years.

Purchase originations for this year are pegged at $1.48 trillion, dropping to $1.45 trillion next year and $144 trillion in 2006. In contrast, refinance activity is expected to decline significantly from $1.19 trillion in 2004 to only $68 billion and $46 billion in 2005 and 2006, respectively. As a result, the refinance share in mortgage originations is expected to plunge to only 32% in 2005, and even lower to 26% in 2006 versus the 45% seen in 2004.

Driving the purchase market is employment growth. The MBA predicts the economy will generate about 400,000 new jobs per quarter over the next couple of years. The MBA's vice president of Research and Economics Jay Brinkmann also mentioned other factors fuelling home buying. The current low rates are keeping mortgage payments attractive versus apartment rents as well as making homeownership affordable for immigrants. Lenders are also currently offering innovative products such as hybrid ARMs and loans that help borrowers buy houses while rebuilding their credit.

Economic indicators are rather anemic. GDP is expected to decline to 3.5% in 2005, and 3.4% in 2006 from 4.4% this year. Consumers are expected to lay low with personal consumption expenditures dropping to 2.6% in 4Q04 from 4.4% in the 3Q04.

At a press briefing held last Tuesday, MBA chief economist Douglas Duncan attributed the rather muted economic growth to the fact that the current level of business fixed investment has been lower compared to the two previous economic expansions. Duncan added that for the last four quarters, dollar inventory levels have been high, prompting businesses to back off. The rise in fuel prices might also erode household disposable income. Also, rising rates should curtail cash-out refinancings - an important component of consumer spending.

With inflation levels considered mild, the Federal Reserve is not expected to be overly aggressive going forward. Douglas estimated that the Fed might raise rates by 25 basis points this November and then remain on hold through the first quarter of 2005, or maybe even longer than that, before tightening further. The 10-year Treasury yield is expected to end the year at 4.3%, 2005 at 4.9% and 5.1% in 2006. This would put the 30-year fixed rate mortgage at 5.9% at the end of 4Q04, increasing gradually to 6.5% by the end of next year and end 2006 at 6.8%.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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