Housing may cool to only hot

Little impact expected from higher rates

Outlook for 2004-2005

Mortgage industry sees refinancings slowing

November 30, 2003|By John Handley | John Handley,CHICAGO TRIBUNE

The tidal wave of homebuying that has washed across the country for the past three years may ebb next year.

But even a weaker housing industry still will be rolling along at near-record levels, according to Douglas Duncan, chief economist of the Mortgage Bankers Association, a trade group based in Washington.

Those thinking of buying a house next year will find mortgage rates up slightly, from about 6 percent now for a 30-year, fixed-rate loan, to 6.5 percent, Duncan said in a mostly sunny outlook for 2004 and 2005. The upward creep is expected to continue, hitting 7 percent by the third quarter of 2005.

Meanwhile, residential prices are seen rising 4 percent to 5 percent a year, a more modest increase than in the recent past.

Rock-bottom interest rates have sparked frenzied activity in the mortgage and housing industries, powering them to records and positions of economic strength in the recession. And consumers have been cashing in on the good times, buying houses, refinancing mortgages and cashing out some of their equity.

The mortgage industry, though, sees stormy weather ahead. The refinancing boom of the past three years seems headed for a plunge, which will result in a significant contraction in the industry.

That's because refinancings, which account for 66 percent of the mortgage pie this year, "will drop to 28 percent in 2004, cutting the total volume of mortgage originations in half - from $3.3 trillion to $1.6 trillion," Duncan said.

Though refinancings will plunge, mortgage originations for the purchase of homes will hold up to near 2003 levels, according to Duncan. And, the consumer could benefit from the increased competition for business for mortgage purchases.

"Mortgage companies will have to be more creative and competitive next year," said Robert Couch, newly elected chairman of the bankers' group.

Consumers also might reap benefits from increased competition among appraisers and title companies.

In the home-appraisal phase of getting a mortgage, there will be more availability and more choice of appraisers, according to Alan Hummel, president of the Appraisal Institute, which has 18,000 members nationwide and headquarters in Washington and Chicago.

"We have been working with our members for several years to diversify and offer other services. For example, they could develop a specialty of appraising the value of rehabbing," Hummel said. "Will a proposed rehab result in a sufficient payback when the house is sold?"

Another possible avenue for diversification for appraisers could involve helping homeowners determine whether their property tax assessment is correct.

"If it is overestimated, they may be able to get it lowered," Hummel said.

Despite reduced business in the mortgage market, "home sales in 2004 should be robust by historical standards," Duncan said.

"Imagine a medal stand at the Olympics," Duncan said. "In the housing and mortgage fields, the bronze medal was awarded for the pace of 2001, the silver for 2002 and the gold for 2003. Next year, we will drop down a step to the level of 2002."

The economist forecast "a modest dampening of first-time buyers. Recently, because of falling rates, move-up buyers were getting more house at the same mortgage rate. But that will not apply in 2004."

As mortgage rates rise, housing starts are expected to fall - from 1.69 million this year to 1.63 million in 2004 and 1.62 million in 2005. The median price of existing homes will go from $171,500 now to $181,100 in late 2004 and $186,400 at the end of 2005. The median price of new homes, currently $193,400, will hit $197,600 about a year from now and top out at $202,700 at the end of 2005, according to the MBA's long-term forecast.

"In my view, the economy is taking off. There will be significant employment gains next year. Unemployment will decline from the peak of 6.2 percent in the second quarter of this year to a healthy 5.6 percent by the end of 2005," Duncan said.

"The health of the real estate finance market is directly dependent on jobs creation, and we anticipate significant jobs growth through 2004 and 2005," he added.

There are potential problems on the horizon, however, and though they may seem remote and difficult to understand, they could directly affect consumers.

One is the financial safety of the mortgage industry. In June, the rock-solid reputation of Freddie Mac, the mortgage giant, took a hit when the company fired three of its top executives amid charges of accounting irregularities.

Treasury Secretary John W. Snow called for more oversight of Freddie Mac and Fannie Mae, the nation's other mortgage powerhouse.

The Bush administration favors turning over regulation of Freddie Mac and Fannie Mae to the U.S. Treasury to assure markets that the mortgage finance companies do not pose a risk to the financial system. The two companies own or guarantee more than 40 percent of all mortgages in the United States.

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