In a revised economic forecast that should be good news to home buyers and sellers alike, the nation's largest supplier of mortgage money now believes the housing market will remain surprisingly strong through the first half of next year.

While David Berson, chief economist at Fannie Mae, expects some slowing next year, he feels certain home buyers will remain confident enough to remain in the market -- even though loan rates will continue to trend a little bit higher.

Fannie Mae is a federally chartered financial intermediary which keeps mortgage money flowing by purchasing loans from local lenders, packaging them into securities and selling them to investors worldwide.

Economic growth has a "bigger impact" on housing than mortgage rates, Berson said at a press briefing yesterday. So if the economy continues to grow, the housing market won't slow much at all, at least for the first six months.

After that, though, housing is likely to falter no matter what happens in the general economy.

The economist is hoping that by mid-year, growth will slow pretty much on its own accord. But if it doesn't, he expects the Federal Reserve Board to put on the brakes by driving rates higher still. And that, he says, should be enough to pull the throttle back on the housing market.

Under Berson's latest scenario, housing sales will fall next year by 7 percent. "That's not a big drop," he says, "and still results in the third highest level of home sales ever. That's an awfully strong year, no matter how you measure it."

He also believes loan volumes should only decline to $993 billion in 2000. And "with a little luck," he "wouldn't be surprised" if they hit the $1 trillion mark.

Just last week, the economist was looking at an 11 percent slide in sales and just $945 billion in mortgage originations. Home sales should total more than 6 million this year, while loan volumes are likely to top $1.3 trillion.

Berson thinks the Fed would be happy with the gross domestic product growing at a rate of about 3 percent a year "not a big drop from where we are now." And expects the central bank to tighten intertest rates sometime during the first quarter to achieve that rate.

If the move works, he says, the economy should slow enough to keep the Fed from tightening again. But if the economy doesn't slow to what the Fed considers a sustainable pace of non-inflationary growth, he's certain the Fed will tighten again.

Under either scenario slower economic growth in the first half or higher loan rates in the second half housing will feel the pinch.

The Fed has already tightened the monetary purse strings three times since last summer, raising the federal funds rate, the interest rate financial institutions charge one another on overnight rates -- a quarter percent each time.

Published: December 16, 1999

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