Economists at Freddie Mac are more pessimistic about the economy than they were just a short month ago, and no longer believe mortgage origination’s will rebound in 2009.

And as bleak as these projections are, the real question is — who knows where all of this is going: Mortgage origination’s down, home sales down, home values plummeting, interest rates up, housing starts down, unemployment rising, etc. 

More frightening is that the financial dominoes are truly starting to crumble before our very eyes, and we have not even gotten the results in from what is expected to be a devastating holiday shopping season, which represents nearly half of all U.S. consumer spending, which accounts for 70% of our economy annually. So what will Freddie Macs Economists have to say then ….

In a forecast issued today, Freddie Mac’s Office of the Chief Economist said total mortgage origination’s are expected to shrink by about 8 percent in 2009, to $1.65 trillion, before rebounding to $1.82 trillion in 2010. That compares with $3.26 trillion in purchase loans and refinancing originated in 2005. Here is the rub, though. Just last month, Freddie Mac was projectingthat mortgage origination’s would rebound to $1.92 trillion in 2009 and hit $2.04 trillion in 2010. So the numbers are a changing ….

• Freddie Mac economists boosted their projections for continued growth in FHA- and VA-backed loans, however, saying they should reach $286 billion this year and peak at $340 billion in 2009, a more than four-fold increase from $80 billion in 2006.
• Freddie Mac’s latest forecast includes new, lowered projections for economic growth, housing starts, sales and prices in 2009. Freddie Mac also bumped up previous projections for unemployment and interest rates.
• Instead of 960,000 housing starts, Freddie Mac now expects work will get underway on 830,000 homes in 2009 — a 12 percent decline in housing startsfrom projected 2008 starts and a 60 percent dropoff from the recent peak of 2.07 million housing starts in 2005.
• A decline in housing starts would ordinarily take pressure off of inventory. But Freddie Mac now expects only a minor rebound in home inventory, as a result in lower sales next year.
• Last month, Freddie Mac was forecasting that total home sales would rebound from an estimated 4.86 million this year to 5.13 million in 2009. While Freddie Mac’s projections for 2008 sales remains virtually unchanged at 4.87 million, it now sees 2009 home sales topping out at 5 million, down 33 percent from the 7.46 million sales seen in 2005. The forecast for home sales to rebound to 5.6 million in 2010 remains unchanged from October.
• Freddie Mac economists also see greater potential for home-price declines than they did a month ago. Last month, Freddie Mac expected a 13 percent decline in the Standard & Poor’s Case-Shiller national home-price index for 2008, followed by a 5.1 percent decline next year and 2 percent in 2010. Now, Freddie Mac projects prices tracked by the index will fall 13.9 percent in 2008, 7.8 percent in 2009, and 2 percent in 2010 … that’s a 23.7% additional drop in home prices. Wow!!
• Freddie Mac said it expects 1.3 percent growth in real gross domestic product during 2009, rather than the 2.3 percent projected in October. Unemployment is projected to rise to 7.5 percent in 2009 before falling back to 6.7 percent in 2010. Last month, Freddie Mac projected that unemployment would peak at 6.8 percent next year.
• Historically, interest rates sometimes come down when economic growth slows. But with this downturn built on falling home prices and frozen credit markets, Freddie Mac projects rates on 30-year fixed rate mortgages will trend upward slightly in the next two years, rising from 6.1 percent this year to 6.3 percent by 2010. Last month, Freddie Mac projected rates on 30-year fixed-rate mortgages would fall to 5.9 percent in 2009 before spiking to 6.2 percent in 2010.
• Freddie Mac’s projected rates for one-year Treasury indexed adjustable-rate mortgage (ARM) loans remained unchanged from a month ago — 5 percent next year and 5.3 percent in 2010.

Tags: Economy, November 2008

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