Signs that housing markets are nearing a floor include stabilizing mortgage applications for home purchases, “cautiously optimistic” consumer sentiment, and a slowdown in price appreciation that will help improve affordability.

That’s the assessment of economists at Freddie Mac in their monthly report on the outlook for the economy and housing.

Economists at the government-sponsored mortgage repurchaser warn that there “will undoubtedly be more bumps on the way” and that the “ride could be rocky in some markets.” But solid economic fundamentals “should help avert a crash landing.”

The economy has been helped by falling energy prices, including a 25 percent reduction in gasoline prices since August. Consumer spending continues to expand at a steady pace, even though homeowners took 30 percent less equity out of their homes in the second quarter than last year. Past gains in housing prices, which give homeowners the ability to borrow money using equity in their homes, will continue to bolster consumer spending through 2007, Freddie Mac economists say.

Mortgage rates are down 50 basis points from highs this summer, hitting 6.3 percent in early October. That’s prompted a rebound in refinancing applications, as homeowners with adjustable-rate mortgages lock in lower rates for the long run.

As the gap between fixed and adjustable mortgage rates narrows, the ARM share of the mortgage market is forecasted to drop to 17 percent in the fourth quarter of 2006 and remain there throughout 2007.

Applications for purchase mortgages have stabilized at 2003 levels, when demand for housing was “moderately strong,” Freddie Mac notes.

Freddie Mac economists expect the 30-year fixed mortgage rate will average of 6.4 percent in the fourth quarter, and remain little changed in early 2007. The 30-year fixed-rate mortgage should average 6.5 percent, while the rate for 1-year adjustable-rate mortgages will be about 5.5 percent, Freddie predicts.

Single-family mortgage originations are expected to total $2.7 trillion in 2006, down 18 percent from 2005. Freddie Mac now predicts originations will fall by 5 percent in 2007, to $2.5 trillion.

Home construction, down an average of 3.4 percent in the first half of the year compared to last year, could be down nearly 20 percent in the second half. Home sales are expected to decline by 9 percent from 2005 to 6.8 million units this year, and slip further to 6.4 million units in 2007.

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