By Shahien Nasiripour in Washington and Nicole Bullock in New York
US home mortgage refinancings will decline 40 per cent this year, according to a Fannie Mae forecast, damping expectations for the Federal Reserve?s latest effort to revive the struggling property market.
Households will refinance about $540bn of home loans, down from nearly $900bn last year and $1tn in 2010, according to the government-controlled mortgage financier, the largest funder of US home loans.
Fannie Mae forecasts that new 30-year mortgages will carry an average interest rate of 4 per cent and the 10-year Treasury note will yield about 2 per cent.
For the Fed, which has committed to keep short-term rates near zero until mid-2013 and recently began trying to lower long-term rates through its so-called ?Operation Twist? programme, the refinancing forecast probably shows the limits of its efforts, said Douglas Duncan, Fannie Mae?s chief economist.
?The Fed would like to see additional refinancing, and they?ve absolutely moved into the fiscal policy arena to get that done, but at the end of the day the decision points are really at the household level,? Mr Duncan said.
About a third of the US workforce is worried about job prospects, he added, a factor that will keep refinancing activity muted due to the significant upfront cash outlay required to refinance a home loan.
?The experience of the last few years suggests that lower mortgage rates might be able to help to some small degree, but the problem in the housing market is not the availability of low mortgage rates,? said Steven Abrahams, Deutsche Bank analyst.
?We have historically low rates today, and the housing market remains soft,? he added.
But as refinancing tapers off, residential investment will contribute modestly to US economic growth this year after representing a drag since 2006, Mr Duncan?s team said.
Fannie Mae projects housing starts will rise about 16 per cent this year, driven by the construction of apartment buildings and a rebound in single-family home building from a record low.
New and existing home sales are also expected to increase, but only by 3.5 per cent amid a considerable overhang from the housing collapse, extremely tight lending standards for mortgages, further declines in home prices and ongoing unemployment.
?It is evidence that we are at the bottom,? Mr Duncan said.
Mr Duncan has said that the US housing market is just halfway through a 10-year recovery.
He warned that a litany of policy and regulatory changes under way, as well as questions over the fate of Fannie and its rival Freddie Mac, are likely to slow both the economic and housing recovery.
?That is the reason why the expectation for the year is as weak as it is,? Mr Duncan said.
? The Financial Times Limited 2012