WASHINGTON -- Fixed mortgage rates will begin a steady decline next spring and cushion the effect of a slowing economy on home sales, according to the chief economist for the Federal National Mortgage Association.
In a yearend forecast for 1995, David Berson said he believes the national average rate on 30-year mortgages will fall to 8.5% by the end of next year from a high of 9.3% this year.
Sales of new and existing homes, Which have been driven by strong employment and income growth this year, also will fall, he said.
Home sales will fall by 4% next year, and housing starts by 5%, he said.
He predicted that total mortgage volume would reach $630 billion in 1995, from an estimated 7510 billion this year. In 1993, $1 trillion of mortgages were originated.
The popularity of adjustable-rate mortgages will ebb as rates on fixed-rate loans fall and the spread between short and long rates narrows, Mr. Berson said.
The market share of adjustable-rate mortgages, which are linked to short-term rates, will fall to the historical average of 30% next year, Mr. Berson said.
This should be good news for mortgage banking companies, which usually do better with fixed-rate loans.
Because the heavy popularity of ARMS recently, thrifts have been winning back some of the market share they lost during the refinancing boom.
The latest numbers from the Federal Housing Finance Board show that ARMS made up 49% of the total market in October; gains for November and December are expected.
Mr. Berson declined to answer questions on how these forecasts would be affected by political moves, such as a middle-class tax cut, which could lead to higher rates if bond traders believe it would increase the federal deficit.
Mr. Berson also would not say how his predictions would be affected if Congress modified the income-tax deduction for mortgage interest.
One proposal would limit deductions to interest on a principal of $300,000, down from $1 million.
Mr. Berson said Fannie Mae had not run models that would simulate the effects of these changes. on the housing market.
Looking ahead to 1996, Mr. Berson said he expects a further slowdown in the economy, but no recession.
Mortgage originations will move up slightly in 1996, along with home prices, Mr. Berson said.
For the rest of the decade, he said mortgage demand will continue to rise as the number of households increases.
Home prices will be 0.5% to 1% above the inflation rate for the rest of the decade, due to a strong demand for homes from baby boomers and immigrant households, he said.
Mr. Berson also made these observations about specific regions of the country:
* The West is expected to show strong growth as California continues to recover, albeit slowly, from its worst downturn in 60 years.
* The mountain states will continue to outpace all other regions.
* The South also should exhibit solid economic growth in 1995. especially in Texas.
* The Midwest is expected to grow at about the national average, with a slowing auto industry beginning to hold back many of the states in this region.
* The Northeast should continue to lag the national recovery, as long-term trends of outmigration, relatively high costs of doing business, and continued declines in defense-related expenditures all combine to hold down growth.
