The Mortgage Bankers Association on Wednesday released its second-quarter update to its long-term economic forecasts for 2004, 2005 and 2006, which projects strong economic growth and robust housing demand.

The MBA forecasts real gross domestic product growth will average 4.6 percent this year, 3.9 percent in 2005 and 3.8 percent in 2006. The unemployment rate will decline from the current level of about 5.7 percent to 5.3 percent by the end of 2006.

“Even with these strong growth expectations, interest rate increases will be modest due to continued expectations of low inflation,” said Doug Duncan, MBA’s chief economist and senior VP.

MBA expects the 10-year Treasury rate will end 2004 at about 4.4 percent, implying a 30-year fixed-rate mortgage rate of about 6 percent. The group predicts the 30-year mortgage rate will rise to slightly more than 7 percent by the end of 2006.

“From a historical perspective, these are very modest interest rate increases for the level of economic growth we are expecting, and should cause few adjustment problems for the housing industry,” Duncan said.

Existing home sales will come off 2003 record levels and fall by 1.7 percent in 2004 and fall by an additional 6.8 percent in 2005. MBA originally expected home sales to fall by 5.1 percent this year and 3.6 percent in 2005.

MBA also expects new home sales will rise by 0.7 percent in 2004 before falling by 10 percent in 2005 and another 1 percent in 2006. The group originally predicted new-home sales would fall by 7.2 percent this year, fall by 3.3 percent in 2005 and remain unchanged in 2006.

Mortgage originations will be down from a record high of $3.8 trillion in 2003, but will hit $2.57 trillion in 2004, $1.96 trillion in 2005 and $1.85 trillion in 2006. Those revised predictions are higher than MBA originally forecast earlier this year, primarily because of the uptick in refis in February and March, Duncan said.

The bulk of the drop-off in loan origination volume will come from refinancings. Mortgage originations for purchasing homes are expected to be $1.38 trillion in 2004, $1.37 trillion in 2005 and $1.42 trillion in 2003.

MBA expects the median price of existing-home prices to increase about 4.5 percent in 2004 and new-home prices to increase 5.5 percent. Price increases in 2005 and 2006 are expected to be in the 4 percent range.

Duncan said, however, that some markets, especially in coastal areas, could see prices drop. Those areas have traditionally been the most volatile and have seen prices appreciate more quickly recently than other areas, Duncan said.

Washington, D.C.- based Mortgage Bankers Association is a national association representing the real estate finance industry.

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