What's in store for 2004? [12/27/2003]

By Willliam Kugel

As we close out the current year, questions abound as to where the economy is heading and what we can expect of the real estate market and the mortgage industry. In this article I have compiled the opinions of leading sources including market analysts and industry spokespersons to in order to provide a glimpse at what the coming year might bring. Here are the highlights: Interest rates could be held to only minor increases. Most sources are optimistic about interest rates but opinions vary as to when increases will show up. It gets a little confusing when you consider that The Federal Reserve recently repeated its belief that low interest rates "can be maintained for a considerable period." According to Frank Nothaft, chief economist for Freddie Mac, "Regardless of the magnitude of the recent economic advance, the Fed will continue its accommodative monetary stance, most likely at least until mid-2004. This is likely because inflation remains well in check. The annual increase in the core of the consumer price index is barely over 1 percent, the lowest in 40 years. This provides the Fed ample cover to keep interest rates low. Mortgage rates, likewise, should average between 6 and 6 percent during 2004."Mr. Nothaft in a live interview suggested that interest rates at the end of 2004 may not be far off the mark from today's current rates. A similar outlook was shared by the Mortgage Bankers Association which reads, "We therefore anticipate that the Federal Reserve will continue to hold short-term interest rates at current levels until late next year, and then will begin only gradually to move interest rates back toward more normal levels." However, the well known Kiplinger Forecasters see it this way: "The Federal Reserve is laying the groundwork for an interest rate hike, probably by mid-2004, but Fed Chairman Alan Greenspan and his colleagues are still hedging their bets in case the current economic acceleration stalls out."As you see, the consensus is for slight to moderate increases with some seeing this occurring in mid-year and others toward the end of 2004. The economy could bolster more consumer confidence. Freddie Mac's economist is saying, "Our forecast for 2004 expects good GDP growth throughout the year, ranging from 4.1 percent to 4.3 percent annualized growth in each quarter." The Mortgage Bankers Association states, "More impressive perhaps than the mere strength of third quarter GDP growth is the growing evidence of a more balanced recovery." However, the MBA questions productivity, stating, "The outlook for productivity gains is, to be sure, quite uncertain. Productivity growth has accelerated further from the trend of the late 1990s, in spite of a recession and, until recently, a sub-par recovery. Perhaps this will prove too be a one-shot increase in the level of productivity with little meaning for its longer-run trend." New lending inroads could be made with minorities. The Mortgage Bankers Association recently praised President George W. Bush for signing the American Dream Downpayment Act. The bill will provide $200 million annually for low-income families and assist an estimated 40,000 families by helping them with down payment and closing costs. Franklin D. Raines, chairman and CEO of Fannie Mae, the nation's largest source of financing for home mortgages, today addressed an audience at George Washington University, stating, "Fannie Mae is an instrument of national policy a policy that says there should be more homeownership." In 2004 look for a continuing unfolding of low down payment loan programs with an emphasis on reaching minorities and low income families. Near record levels could remain in home sales. David Lereah, NAR's chief economist, said the fundamentals responsible for this year's housing record will be in play next year as well. "Home sales will be off mildly for the second best showing ever in 2004," he said. "With the economy improving, consumer confidence rising and jobs being created, a growing number of households will sustain strong housing demand. Only a modest rise in mortgage interest rates will slightly dampen the pace of home sales next year." Mortgage patterns will change: More second mortgages, more ARMs, fewer refinancings. According to Kiplinger Forecasts, "Although refinancings have passed their peak, they're likely to continue at a moderate clip as long as interest rates remain relatively low." Among some of the other changes we are likely to see is a greater use of Adjustable Rate Mortgages as well as an increase in applications for second mortgages including Home Equity Lines. One other group of loans likely to be on the increase would be construction loans. The building industry continues to remain hot. Loan limits will increase cutting the use of jumbo loans. Fannie Mae adjusts its conforming loan limits annually. Fannie Mae has announced that it will apply new federal data on mean (average) home prices to increase its single-family mortgage loan limit to $333,700 for 2004, from $322,700 in 2003. "Interest rates are significantly lower on conforming mortgages than on jumbo mortgages," said Fannie Mae Chairman and Chief Executive Officer Franklin D. Raines. "By obtaining a mortgage that Fannie Mae is eligible to buy, in 2004, as many as 95,000 home buyers could save up to $21,900 over the life of a 30-year mortgage."These are but a few of the changes we could see in the coming year. Barring unwelcome surprises we are likely to enjoy another year in the real estate and lending industries almost as robust as 2003 has been.William Kugel is author of the column MORTGAGE$ in publication for 13 years, a senior loan officer with GMAC Mortgage Corp., and a Mount Washington Valley resident. You may write him c/o of The Conway Daily Sun, visit the Web site www.gmacm.net/william_kugel or send e-mail to william_kugel@gmacm.com.All Rights Reserved. Copyright 2003, W.H. Kugel.