Freddie Mac released its monthly Economic and Housing Outlook on Tuesday, with a relieved look backward and an optimistic view of the future.

Frank Nothaft, Chief Economist for the mortgage giant, pointed to tentative year end figures showing that the nation's economy had produced 2.2 million new jobs in 2004, an increase in manufacturing jobs, and a pickup in factory orders all, he said, signs of an improved labor picture for the country.


Northaft forecast that the Federal Reserve would continue to inch short-term interest rates up in quarter-point increments, hitting a Federal Funds target of 3.0% by mid-year and 3.5% by year end. Assuming that inflation remains 'tame,' between 2 and 2.25% for the year, he sees the outlook for long-term interest rates, which would include fixed rate mortgages also good. The yield curve (the difference between 1 year and 10 year Treasury notes) should continue to flatten through 2005, as it did over the second half of 2004. The flatter curve will probably encourage consumers to pick so-called hybrid ARMs. The 5/1 (five years at a fixed rates, adjusting annually thereafter) is now the most popular of these, accounting for two out of every five hybrids written in 2004.

Interest in adjustable rate mortgages (ARMs) will be further encouraged as lenders are expected to increase the discounts they are currently offering on the initial interest rates. As Freddie Mac had noted in its annual survey of adjustable rate mortgages (ARMs) issued last week, lenders are offering average discounts of 1.3 percentage points off of the fully indexed rates of ARMs during the initial fixed-rate period. This is up nearly a full point from the discounts that were offered at the beginning of 2004.

All of this, the report said, should mean that the housing market 'should have another splendid year in 2005.'

Housing starts and home sales are expected to fall off from the record setting rates of 2004, but only by one to two percent. Freddie anticipates total new and existing home sales of 7.75 million units in 2005.

And don't look for the bubble to burse just yet. Freddie projects that housing appreciation, while less than last year, will still be at a more than respectable 7.2% this year and 6.3 percent in 2006.

Single family mortgage originations are expected to decline considerably to $2.6 trillion in 2005 and $2.3 trillion in 2006 from $2.75 trillion in 2004. This decline will be almost totally accounted for by a decline in refinances which are expected to make up only 39 percent of the total residential mortgage market this year and 32 percent next year. Refinances accounted for 46 percent of mortgage originations last year.

Home equity loans and second mortgages are expected to be the vehicle of choice for home owners desiring to pull equity out of their homes. These loans types accounted for almost 20 percent of the growth in single family debt in the year ended September 30, 2004, a trend that Freddie Mac expects to continue.