The January 2007 Economic Outlook which is published last week by the Office of the Chief Economist at Freddie Mac was headlined "The Remodeled Housing Market" and was focused on economic trends.

But first it recapped the current housing market: an 11 percent November 2005 to November 2006 drop in home sales; mortgage applications for home purchases at the lowest level since mid-2003, a sudden switch from a sellers' to a buyers' market with a 7 month inventory and a drop in the pace of house-price growth.

Pretty grim, but we mustn't forget the trends which, the forecast said, come and go; however, in the last five years there have been three trends that have "remodeled housing finance and become fixtures of the housing market."

The first trend is a higher level of refinance activity. The housing boom and the general obsession with real estate have made homeowners more aware of refinancing options and savvier in utilizing them while at the same time technology has reduced the cost of originating mortgages. This has, over the last 15 years, led to three refinancing booms when the number of homeowners refinancing has constituted over 50 percent of all mortgage origination activity. Each time, as the refinancing frenzy ebbed, the bottom was higher than the time before: in late 1993 refinancing accounted for 64 percent of all mortgage applications but by early 1995 that share had declined to 11 percent. In 1998 refinancing represented a 59 percent mortgage share and then bottomed out at 15 percent a year and a half later. In the latest boom refinancing hit 77 percent in early 2003 then settled to 39 percent five quarters later and now, even as rates inched up last year the share has stayed between 45 and 50 percent.

The second trend is the diversification of the refinancing market. With so many more mortgage products homeownership is available to a growing number of families. Borrowers with low credit ratings have found shelter through the sub-prime market while non-traditional or "exotic" mortgages with lower introductory rates have made it possible for buyers to afford homes in more expensive areas. Freddie Mac speculates that the huge numbers of adjustable rate mortgages, estimated at $500 billion, which are due to adjust during 2007, will create mounting delinquencies and increase public scrutiny of non-traditional products.

The third trend is the lack of affordable housing. Even though housing prices have stopped increasing exponentially, the resulting high prices from the "bubble" are serving to preclude homeownership by many and housing affordability is now at its lowest level since the late 1980s when double-digit interest rates were the culprit. The forecast states that there is little hope that new construction will ameliorate the affordability problem as little new construction comes in at under $150,000 per unit.

These three trends, the forecast projects, will, in the wake of the housing boom and subsequent slowdown, have a lasting impact on the nation's housing market and the way people finance their home purchases.

More specific projections from the forecast:

• Inflationary pressures are expected to remain low in the face of falling energy prices. Any energy price shocks could of course, impact this prediction.
  
• Low inflation is likely to keep long term interest rates below 6.5 percent this year and the yield curve, i.e. the difference between short and long-term rates is likely to remain inverted throughout the coming year. 1-year Treasury ARMS are forecast to average 5.5 percent each quarter of 2007. But see the energy-price caveat above.
  
• The market share of ARMs will probably drop to14 percent, the lowest level since 2001. This will happen because of the inverted yield curve but also because regulators worried about rate shock, are likely to pressure lenders to be more conservative in their lending practices.
  
• Housing starts will bottom out in the first half of 2007 and then begin to rise slowly over the remainder of the year. The final total will probably be about 11 percent below the 2006 pace.
  
• Housing sales will follow a similar pattern but low mortgage rates will help to pull buyers back into the market. Single family home sales will be about 6 percent lower in 2007 than in 2006.
  
• It is hard to measure falling house prices as these become confounded with sales as sellers refuse to lower prices and thus incentives such as seller-paid closing costs and other inducements do not register in the statistics as price declines. Freddie Mac expects prices nationwide to be up 2.9 percent this year but also expects the numbers to vary widely based on location and to also be quite volatile.
  
• Mortgage activity will decline about 6 percent from 2006 figures but the pending readjustment of interest rates will drive a lot of homeowners to refinance to avoid an increased payment. Mortgage debt will grow at about 7 percent which would be the slowest rate since 1997.