Freddie Mac's August 2005 Economic Outlook report issued this week states that "The brightest light in the U.S. economy continues to be the housing sector."

The report notes that new records were achieved in June for sales of both new and existing houses and sales and are running six percent higher during the first half of 2005 than the same period in 2004, also a record year; a performance that is attracting investors into the market for single family homes. The report quoted data compiled by LoanPerformance showing that investors were responsible for 10.3 percent of prime, conforming mortgages loans taken in the first quarter of 2005 and that another 7.3 percent of mortgages were for the purchase of second homes. The combined 17.6 percent of mortgages represented by these two categories has nearly doubled since 2001. Some builders, the reports said, are now adding provisions to their sales contracts to prevent flipping homes during construction and through the first year or two after completion.



The report cautions that rising interest rates will eventually dampen housing demand but that a stronger job market may offset the effects of rates to a certain extent. Oil prices, however, may create a drag on the economy and, if they near $100 per barrel, could stimulate fears of recession. Our relations with China could lead to a decline in their demand for Treasury bonds and mortgage-backed securities which could, in turn, lead to higher interest rates than currently expected.

Still, Freddie's predictions remain optimistic. The report continues to project interest rates around 6 percent by years end and around 6.3 percent by the end of 2006. It also sees ARMs maintaining their current 30 percent share of the market due to discounted initial rates offered to borrowers.

While home sales and housing starts are both expected to moderate with starts totaling 1.98 million and 1.93 million units in the last two quarters and sales declining by 7 percent in 2006, the report revised upward their initial estimate of house price appreciation. The initial estimate of an 8.6 percent rise in prices for the second quarter has been revised to13 percent. This appreciation rate is projected to fall back to 10.7 in the third quarter and 7.4 percent in the fourth. Such figures should allay fears of a bursting bubble.

Freddie expects that total mortgage originations this year will be over $2.6 trillion with refinancing accounting for 42 percent of that market. Refinances, however, are expected to fall to 33 percent or originations in 2006.