WASHINGTON – "The Coming Crash in the Housing Market" by John R. Talbott warns rising interest rates will cut the value of many homes because potential buyers simply won't be able to afford them. Does this mean credit union members will be forced out of the housing market and credit unions themselves will see the value secured in their mortgage portfolios shrink alarmingly? Douglas Duncan, senior vice president and senior economist at the Mortgage Bankers Association of America, doesn't think so. In fact, Duncan says, "There has never been a full year in the modern history of the U.S. economy when home prices across the U.S. have fallen. There have been a couple quarters of declines, and declines in local markets. If you look at the fundamentals of supply and demand, it's our belief demand is going to increase at a faster pace than supply, supporting house prices over the longer term." The MBAA's first three-year Macroeconomic and Housing Finance Outlook released July 14 indicates the median existing home price will rise 5.4% this year, while the median new home price increases 3.3%. Although the MBA expects home sales to slow to 6.577 million units in 2004 and 6.399 in 2005, that would mean small declines of 3.6% and 2.7%. That should translate into only a modest slowing of appreciation in home prices. In addition, inventories of both existing and new homes on the market will remain low, with current sales rates exhausting the supply of available properties in less than five months. So prices will continue to appreciate and homeowners will see their equity grow. The outlook compiled by Duncan, consulting economist Lyle Gramley and senior economist M. Veronica Warnock shows: * Mortgage origination volume will hit an all-time record in 2003 at $3.4 trillion before declining to $1.94 trillion in 2004 and $1.46 trillion in 2005. That will represent a drop of 43% in 2004 and another 25% in 2005. However, it will still equal the previous record level of 1998. * That $3.4 trillion in 2003 will mark a 36.5% hike from the previous record set in 2002. Some 68% of the 2003 mortgage volume will come from refinancing of existing loans. With the interest rate on a 30-year fixed rate mortgage projected to average 5.7% for 2003, the lowest since the 1960s, consumers have been anxious to refinance before rates rise. * The volume of loans originated for home purchases will actually increase annually across the three-year forecast period. * At the same time, home sales will reduce speed slightly over the next two years after setting a third consecutive annual record in 2003. * Home-price appreciation will slow but remain positive. * Mortgage delinquencies and foreclosures will fall somewhat as the economy improves and unemployment declines. This will be supported by what the MBA expects to be generally positive economic developments, including real growth of 3.5% in the gross domestic product in 2003 and more than 4% in 2004 and 2005. Inflation will slow during the remainder of 2003 and inflation expectations will remain low during the three-year forecast period. That, in turn, will keep interest rates low. Duncan told reporters he does expect 30-year fixed mortgage rates to hit 6.7% by the end of 2005. Home equity loans will take up some of the slack from a falloff in refinancing. Duncan outlined the implications for mortgage originators. "There is going to be excess capacity," he said. "You're going to see some restructuring of the business through mergers and acquisitions. You're going to see a test of the appetite of large financial services holding companies who will see some earnings volatility because of the decline in volume. "For some firms that have sold off all their servicing and have no annuity from servicing, this will test whether they can dis-staff and restaff over cycles and stay competitively viable in the business," he added. During the recent U.S. economic slump housing has shouldered the hero role by continuing to set records, keeping builders and lenders busy. Duncan projects while housing will continue strong, its role as an economic mainstay will be shared by areas such as the service sector and travel and tourism. He acknowledged a wild card such as another terrorist attack could affect economic forecasts. However, he noted, the economic impact of the 9/11 attack on the World Trade Center and Pentagon was limited, especially in terms of the housing market. The MBA report cites some specific factors that have helped the economy. "The consumer has been expected to falter, but has not. While personal consumption expenditures have slowed slightly from their late 1990s peak, they have not fallen dramatically. In fact, consumer confidence outlook indicators are improving," the study states. As for the economy as a whole, here's what the MBA expects: * The economy will achieve annual GDP growth of 2.2% in 2003, 3.6% in 2004, and 3.8% in 2005. * Unemployment will be at 6.3% at the end of 2003, 5.9% at the end of 2004, and 5.6% by the end of 2005. * The 10-year Treasury rate will end 2003 at 3.9%, 2004 at 4.5% , and 2005 at 5.0%. * The spread between the 10-year U.S. Treasury and the 30-year fixed rate mortgage will remain at 190 basis points throughout the rest of 2003. -

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