Freddie Mac's message might be, "Be A Patriot, Buy A House" - Or at least that seems to be the underlying message of Freddie Mac's July Economic Outlook Report.

The monthly report, prepared by the Office of the Chief Economist, states that it is housing that is indeed providing substantial impetus to the U.S. economy. Housing consumption and investment provided 22 percent of the growth in the U.S. Gross Domestic Product (GDP) according to revised figures for the first quarter of 2005. And you can add to that the fact that consumer spending related to residential fixed investment (RFI) accounted for 15 percent of nominal GDP growth. RFI primarily consists of money spent on renovations, new construction, and other home buying expenses such as real estate commissions.



Preliminary information for the second quarter which ended on June 30 indicates that single family housing starts were off slightly from the record breaking numbers in the first quarter but new and existing home sales statistics looked as though they might set a new record. Thus, housing will continue to be an important component that sustains economic growth, although at a slightly lower level than seen in the first quarter.

Freddie attributes this activity directly to the level of mortgage rates which, as everyone knows, has defied predictions and is now at a 14 month low for fixed rates. Adjustable rate mortgages have also remained low as lenders have increased the initial-rate discounts they offer on both traditional and hybrid products. The average initial rate discount on a 1-year ARM at the end of June was 200 basis points, the largest discount in five years. Discounts and products such as interest only and option payment loans have kept the ARM share of mortgage originations near one-third of the total market.

Continued good news in the housing sector forced Freddie to revise some of its predictions for 2005, including those for overall interest rates, home price appreciation, mortgage originations, and the ARM share of the market.

The report predicts that long-term rates, which are "steadfastly refusing to go higher" will average 5.8 percent for the year, "The same average rate we have enjoyed for the past two years." The prediction in the Freddie Mac report for May was 6.0 percent and in June 5.9 percent. ARMs are expected to constitute 32 percent of the market in 2005 (last month's report predicted 31 percent.)

Housing starts are projected to hit a new record of 1.99 million in 2005 (.03 higher than last months estimate) and home sales are expect to also set a record at 7.21 million transactions (the June estimate was 7.10 million.)

Perhaps the best news of all for owners if not for shoppers: housing price appreciation is expected to be 7.9 percent - 0.2 percent high than predicted last month.