The number of homes changing hands in 2006 could decline by up to 10 percent, and mortgage originations could fall by 18 percent to $2.41 trillion, the top economists at Fannie Mae project.

In a report issued Wednesday, Fannie Mae economists David Berson and Molly Boesel said a weakening investor demand and a lack of affordability could bring sales volume down 8 percent to 10 percent this year, to 7.61 million units. That would still be the third-best year ever for home sales, the report notes.

“The surge in the number of immigrants over the past 25 years, the age-structure of the population, and continued job and income growth as the overall economy grows around trend rates should partially offset the drop in sales related to affordability and investors,” the report said.

The falloff in sales will be most pronounced in areas with weak economies and where the falloff in investor demand creates a large increase in the supply of homes for sale. Home prices could fall in those areas, slowing overall home-price gains to 3 percent in 2006, ending two years of double-digit growth.

A recent surge in new-home sales — new-home sales jumped by 4.6 percent in May, to the highest level since December — appears to be an anomaly, Berson and Boesel said, possibly caused by double counting sales as cancellations have risen. For the first five months of 2006, actual sales were down 10.8 percent from a year ago, and the Mortgage Bankers Association purchase applications index in June was at its lowest level since October 2003.

“Even though new sales have increased, the level of unsold inventories has continued to climb to record highs — clearly a warning sign for home prices should sales slip in coming months,” the Fannie Mae report said. “We think that sales will decline over the rest of the year, as leading indicators of sales continue to weaken.”

The expected drop in home sales will also have an impact on mortgage originations, which Fannie Mae predicts will fall 18 percent to $2.41 trillion. While mortgages associated with home purchases are only expected to decline by 2 percent, to $1.48 trillion, higher interest rates are expected to continue to squeeze the refinance market, which Berson and Boesel predict will slide by 36 percent to $931 billion.

That’s even after taking into account an expected pickup in refinancing of adjustable-rate mortgages as consumers try to avoid higher monthly payments by moving to fixed-rate or lower-rate ARMs. ARMs are still expected to account for a 25 percent share of home loans two years from now (compared to 29 percent today), because it will take several years of slower home-price gains before some home buyers can take advantage of fixed-rate mortgages.

Citing Commerce Department figures, Fannie Mae’s economists think real gross domestic product (GDP) growth slowed to 2.5 percent to 3 percent in the second quarter, down from 5.6 percent in the first quarter. High energy prices, the lagged effects of tighter monetary policy and a drop in the housing market should keep inflation in check, they say, which could allow the Federal Reserve to hike the federal funds rate one more time this year, holding at 5.5 percent or perhaps even rolling rates back.

“We expect the Fed to tighten one more time before the end of the summer, bringing the federal funds rate up to 5.5 percent, before it pauses for a while to observe the impact of … tightening on inflation and economic activity,” they said. “If, as we project, core inflation falls back a bit as the economy slows, then the Fed could remain on the sidelines for a while — and possibly even ease slightly in 2007 if economic growth remains at a below-trend pace. But if core inflation rises further or economic growth remains above-trend, then additional tightening probably would occur.”

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