A major mortgage industry group today released its three-year economic forecast update, projecting robust economic growth of 3.5 percent through 2007, fueled in part by continuing record-high home sales.

The Mortgage Bankers Association predicted that total residential mortgage production in 2005 will be $2.74 trillion, the third-biggest year behind 2003 and 2002.

“At about 3.5 percent, economic growth will be solid this year, despite a drag from sharply higher energy prices and a widening trade deficit. Housing will continue to be a major contributor. We expect the string of record-high home sales to continue for the fifth consecutive year,” said Doug Duncan, MBA chief economist.

Duncan predicted that the labor market will remain strong, even with an expected pickup in productivity in the second half of the year. Core inflation should edge higher this year but remain near the Fed’s target of 1.5 percent, Duncan said.

“The Fed is expected to continue its modest tightening through next year to insure that inflation remains under control,” said Duncan. (The Federal Reserve raised the cost of overnight money to 3.25 percent June 30, the ninth of a series of consecutive hikes.)

However, Duncan asserted, “Long-term rates will remain quite low, supporting residential and commercial real estate finance activity.”

Duncan said, “Long-term rates should gradually increase from current levels by 20 to 30 basis points by the end of 2005, and another 40 to 50 basis points during 2006, finally reaching about 6.25 percent for a 30-year, fixed-rate mortgage in 2007. Despite a moderate increase from a currently low rate environment, interest rates will still be quite low by historical standards.”

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