Wednesday, January 24, 2007

Worst is over

David Berson, chief economist at Fannie Mae, told reporters last week that the "biggest declines (he was talking about the real estate market) are behind us." "There are still some (declines) to go," he said at a National Press Club briefing, where he presented Fannie May's 2007 outlook for the economy and mortgage market. "But the worst is over."

Although key housing market benchmarks have stabilized in recent months in response to lower mortgage rates and warmer-than-normal temperatures, Berson expects sales to fall further in 2007. He is predicting a 7-8 percent drop in sales, which he said "is more than just a little bit, but not as much as last year."

If Berson's projections are on target, sales this year will be at their lowest level since 2002, while the two-year decline would be the largest since the 1989-'91 downturn. And as have others, the Fannie Mae economist attributes the slide largely to declines in investor activity. "You can't argue with their choice of investments. After all, housing prices recorded double digit gains in 2004 and 2005," he told reporters. "And now it makes sense for them to invest their money elsewhere."

Berson said that by mid-year, "most of the decline in investment activity should be behind us." By then, prices should begin to turn around, he also said. But for the year as a whole, prices will be down 1-2 percent on a national basis, he added.
Asked which markets will be in for the toughest sledding, the economist said those which showed the sharpest gains will also show the sharpest losses. But the declines won't be as great as the increases, he ventured, "so prices on average will continue to go up."

Overall, though, Berson predicted that 2007 "will be a strong year for housing, but far from a record year." And the next several years will see "slower, more sustainable growth." Because of the drop in sales and "sharp slowdown" in price gains, the Fannie Mae soothsayer is calling for an 11.2 percent decline in purchase money originations -- on top of the estimated 3.1 percent drop in 2006. Refinancings, on the other hand, will be little changed, as borrowers continue to turn in their adjustable mortgages for the fixed-rate variety at a stepped up pace.
As for loan prices, Fannie Mae is expecting long-term rates to hold relatively stable much of the year until the Federal Reserve Board begins to ease back on the economic hatches.


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