The Mortgage Bankers Association expects the interest rate on a 30-year fixed-rate mortgage to jump from 6.2 percent to 6.5 percent by the end of the third quarter, as investors lose hope that the Federal Reserve will slash short-term rates any time soon.

In a long-term forecast released this week, MBA Chief Economist Doug Duncan predicted existing-home sales will decline by about 7 percent this year compared to 2006, and that sales of new homes will decline by about 8 percent. Sales in both categories are projected to rebound in 2008 by about 3 percent and 1 percent, respectively, in 2009.

Duncan expects existing-home price appreciation to slow “significantly” over the next three years, and that median prices should remain relatively flat for new and existing homes. Price gains for both types of housing are expected to be limited to about 2 percent in 2008 and 2009.

With interest rates up and home sales down, total residential mortgage production in 2007 is projected to be $2.39 trillion, a 5 percent decline from an estimated $2.51 trillion in 2006. The Mortgage Bankers Association projects total mortgage originations will decline an additional 4 percent to $2.29 trillion in 2008 and drop another 6 percent to $2.15 trillion in 2009.

Residential mortgage originations for purchase loans could reach $1.33 trillion in 2007 and remain flat in 2008 before edging up slightly in 2009. Residential refinance loans are projected to total $1.06 trillion in 2007 before declining to $957 billion in 2008 and hitting $800 billion in 2009.

Duncan sees the unemployment rate increasing from 4.5 percent to 4.9 percent by the end of the year, but envisions real GDP growth will pick up to an average of 3 percent in 2007, 3.3 percent in 2008 and 3.4 percent in 2009.

The MBA’s top economist expects the Fed to hold the short-term federal funds interest rate at 5.25 percent. With financial markets lowering their expectations of an easing in the federal funds rate in the first half of this year, long-term interest rates are on the rise, he said.

Duncan warned that the housing sector could deteriorate more than projected, with sharper declines in single-family housing starts and home sales. If the core inflation remains high, the Fed might be reluctant to bring the federal funds rate down, increasing the risk of recession.

Continued deterioration of the housing sector “could lead to a marked slowdown in consumer spending growth and threaten an economic expansion,” Duncan said in a prepared statement. “If so, the Fed could start easing to prevent a recession. However, if core inflation remains elevated or even edges higher, the Fed would likely remain on the sideline, increasing recession risks. We believe the probability for this scenario to be small.”

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