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
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