Fannie Mae economist sees refi boom lasting into '94.

David W. Berson, chief economist for the Federal National Mortgage Association, told those attending the Eastern Secondary Mortgage Market Conference recently in Raleigh, N-C., that the good times they had been experiencing would continue well into 1994. Following are excerpts from his talk.

The housing market, like the national economy, exhibited mixed results in July. Housing starts and new home sales both declined, while existing-home sales rose sharply.

The trend in all three of these indicators of housing market activity is still positive, however, with single-family starts up by more than 10% over the past year and total home sales rising by nearly 13%.

The more forward-looking indicators of housing market performance are showing unambiguous improvement - with the National Association of Home Builders' monthly survey of activity up strongly over the past two months and the Mortgage Bankers Association weekly survey of originations for purchases rising to a new high.

Minor Setback

The best interpretation of the mixed July housing figures is that they are a small setback on the road to housing recovery. All of the housing indicators should turn noticeably stronger soon. Historically, the NAHB and MBA survey figures have predicted sales and starts very accurately, and there is no reason to believe that this is not the case now.

Yields on 30-year bonds have dropped by about 70 basis points in the past five weeks - the sharpest one-month decline since the collapse of oil prices in. 1986. Short-term rates have remained relatively stable, however, as the Federal Reserve has given no hint that it is about to +change the course of monetary policy.

As a result of these differing movements, the yield curve is now the flattest it has been since the end of 1991 (albeit a still-steep 285 basis points between the federal funds rate and the 30-year bond).

Applications Up Sharply

Mortgage market activity continued to rise substantially in August and early September, according to the mortgage application survey compiled by the MBA.

The drop in mortgage rates over the past month ensures that the current - fourth - refi wave will last for at least the next several months, while the record-high purchase applications portend a considerable pickup in home sales.

Together, the MBA figures presage record origination volume. Mortgage rates have mirrored the declines in Treasury rates, with rates on 30-year fixed-rate mortgages dropping to about 6.8% - the lowest level since 1968.

Rates on adjustable-rate loans continue to break records, falling to nearly 4.3% in early September - without increasing the ARM share.

Rise in Short Rates

The yield curve should continue to flatten over the next couple of years, but we expect a greater share of this flattening to come from rising short-term rates - with the yield curve remaining relatively steep.

Assuming that mortgage rates remain relatively low and home sales pick up, single-family originations should rise to nearly $1.1 trillion this year. The current refi wave seems likely to last into the first half of 1994, albeit with declining strength.

As rates begin to drift upward next year, however, refi activity should begin to quickly dwindle. This should result in originations of about $864 billion - which would still be the third-highest level ever.

Homes sales should continue to move upward over he next year, as buyers respond to low mortgage rates and - eventually - faster economic growth.

The nearly 4.8 million home sales that we project for next year would be the strongest level of sales since 1978, and would be the second-highest level ever.

Even this year's approximately 4.4 million, sales would be the strongest since 1979. As a result, purchase originations should rise to record levels both this year and in 1994.

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