Purchase and refinance mortgage originations could decline by as much as 33% over the next two years, as the full impact of the sub-prime credit shock and fallout is not yet seen as bottoming out in the immediate near term, says the Mortgage Bankers Association.
In his general presentation to the MBA's 94th Annual Convention and Expo in Boston, MBA Chief Economist and SVP Doug Duncan said that: "among other uncertainties we face are the impact of sharply higher energy costs, the impact on inflation from higher import prices due to the falling dollar, and the impact of uncertainty over the tax policies coming out of Washington. The underlying fundamentals of the economy, however, should be strong enough to get us past this period so that economic growth should return to normal levels by the second half of 2008."
Housing sales in 2008 could be below 2007 levels until late 2008, but given the over supply of homes in a number of markets, any significant increase in homebuilding is probably years off, Duncan said.
On the subject of increased supply, Mr. Duncan cited cancellations of home sales, where the buyer walks away from the sale, and real estate owned (REO) property, as supply that resurfaces on the market but is not accounted for largely in the data. This excess supply is still to be accounted for and "worked off" before the market can mount any sort of a rebound. With HPA declining and the influence of speculators firmly removed for now, demand will also decline. Those two diametrically opposite occurrences will serve to stifle housing in the near term, says Mr. Duncan
"The drag on GDP growth from the housing sector is being at least partially offset by strength from international trade. During the last four quarters, residential investment in constant dollars fell by $97 billion, while net exports rose by $53 billion.
Strength from the external sector will surely continue, given robust growth abroad, a declining dollar, and the impact of slower growth at home moderating the rise of imports."
Key points of the MBA forecast:
1. Total existing home sales for 2007 to decline about 12% from 2006 to 5.72 million units. Sales decline further by about 10% in 2008 before picking up 5% in 2009.
2. New home sales decline 22% from 2006 to 819,000 units, with an additional decline of 10% in 2008. 2009 new home sales rise by about 6%.
3. Home prices for new and existing homes are expected to decline this year, with median prices off about 2%. Similar declines are expected for 2008 before flattening out in 2009.
4. Residential purchase mortgage originations will decline 15% in 2007 to $1.18 trillion from $1.4 trillion in 2006. Purchase originations should fall by 15% to 1.00 trillion in 2008, rising by 5% in 2009 as home sales pick up.
5. Refinance originations might decline 15% in 2007, from $1.33 trillion in 2006. The tightening lending standards will significantly curtail activity as loans face resets this year and next. Fed Actions will serve to restore liquidity to the financial markets; however, the modest increase in mortgage rates as the economy improves will cut refinance activity by 22% in 2008, and 18% in 2009.
6. Total mortgage production will be down 15% this year to $2.31 trillion and total originations will drop 18% next year. An expected drop of another 6% in 2009 as the 5% increase in purchase originations partially offset a projected 18% decline in refinance originations.
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