SAN DIEGO - In a press conference at the Mortgage Bankers Association (MBA) 90th Annual Convention and Expo, economists from the MBA said the picture is improving, which will likely lead to employment growth in the coming year. The MBA also said that refinancings are going to decrease dramatically, as the market moves toward a purchase environment.

Mortgage production is expected to reach $3.3 trillion at the end of this year and plunge by half to $1.6 trillion in 2004. In 2005, mortgage production volume is estimated at $1.5 trillion. The decline is attributed to the huge drop in refinancing.

Only modest increases in short-term and long-term interest rates are predicted, as the Fed is not expected to move toward a tightening bias until mid-2004 at the earliest, meaning August or later. Though the fourth quarter of next year maybe a more reasonable time frame. The MBA expects the 10-year Treasury bond yield will slowly move to 5.1% in the fourth quarter of next year from 4.2% in the third quarter of this year.

The employment picture is also expected to improve with employment levels rising to 103 million in 2005. The unemployment rate should drop at the end of next year to 5.8% (if meaningful job creation starts in November of this year) or 5.7% (if meaningful job creation starts in January of next year), from 6.2% currently.

The delay in job growth is probably due to significant productivity gains. Douglas Duncan, chief economist at the MBA, explained that in contrast to previous recessions, productivity gains have been so dramatic in this recent one that employers are usually capitalizing on their earnings before they start hiring.

Duncan also noted that manufacturing jobs are decreasing, and are not expected to come back. Some of the workforce from manufacturing is shifting to services-related work. He added that the lower-valued jobs have been taken out of the manufacturing sector as a result of workers becoming more technologically savvy and higher-skilled. There will also be a movement out of mortgage-related jobs due to the decrease in mortgage origination volume.

On a happy note

Gross domestic product for the third quarter is expected to be in excess of 6%, while fourth quarter GDP is projected at over 4%. The MBA also noted in a press release that mortgage rates would slowly rise from 5.9% in 3Q03, merely increasing to 7% in 2005. "Single-family home production and purchases will therefore remain robust," said the release. "The multi-family residential and commercial sector should pick up

in the second half of next year and retain its strength through 2005."

As for mortgage performance, it should be noted that delinquencies in the conventional/confirming part of the mortgage sector peaked at a lower level during this recession compared to the recession in 1991. However, there might be an uptick in delinquencies going forward from loans originated in the last two years, which are expected to peak three to five years after these loans were originated. Also, there has been a broadening of the credit market to include more loans from the subprime sector, for example.

Aside from these positive signs, Duncan acknowledged that consumer debt has increased but does not necessarily believe this is problematic. He said that there hasn't been a recession in the past that

was caused by the excess of consumer debt.

Offsetting effects

Economists said that housing growth is based largely on employment. Though the quality of existing jobs will probably rise because of increased hours, the rise in interest rates may cut into affordability. This is why in 2004 the number of home sales is expected to decrease while dollar volume will likely rise.

There are also questions about whether housing growth resulting from the increased number of jobs, work hours and wages would be offset by the expected increase in rates. Two different phenomena were happening due to the historical low mortgage rates. Duncan said that first-time homebuyers might have been drawn in by rates, and would have saved up more before buying a house if not for the opportunity to lock in low monthly payments. Similarly, some homeowners might have purchased larger homes, as they were able to keep their monthly payments even with a larger mortgage.

With the expected rise in rates, these two events might cease to happen, dampening housing growth.

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