Frank E. Nothaft, Freddie Mac�s chief economist, continues to paint an optimistic picture for housing sales and appreciation and for continued low interest rates in his monthly economic outlook for February.

Mr. Nothaft noted that the Federal Reserve, in the last eight months, has raised the Federal Funds Rate from 1.0 percent (a 45 year low) to the most recent figure of 2.5 percent. None-the-less, the 30-year fixed-rate mortgage stood, last week, at 5.3 percent, a drop of 0.60 in the period since the Federal Reserve began tightening credit.

The report credited the Federal Reserve�s actions to raise the short-term interest rates with calming fears of inflationary pressures. These moves, while raising short-term rates, have had the effect of lowering the long-term rates and thus flattening the yield curve.

In the period since interest rates were first raised (June, 2004), 1-year Treasury notes have risen to 2.93 percent, an increase of 0.81 percent while 10 year Treasury rates have dropped 0.64 to a current level of 4.09 percent. During this same period, the report states, 30 year fixed-rate mortgages have dropped 0.60 percent to 5.63.

This has put significant pressure on adjustable rate mortgages. They continue to be attractive to buyers because of lender discounts to their initial rate. Freddie expects to see these discounts contributing to a continued market share of around 35 percent, dropping slightly at the end of the year.

Home sales and housing starts are projected to stay strong, but at lower levels than those that set records in 2004. Home sales will fall off about 3 percent to 7.66 million units and housing starts will fall from 1.96 million in 2004 to 1.9 this year. These projections are essentially unchanged from January�s report.

Price appreciation is also expected to slow, but given the record numbers achieved in that category over the last few years, there is still good news. The report projects a price growth of 7.8 percent in 2005, down from 10.5 percent last year. Projections are for an additional, though smaller, decline to 6.3 percent in 2006.

Refinancing will represent a declining share of the mortgage market. Last month most surveys pegged refinancing at around 49% of the total mortgage business. Freddie sees that falling to 41 percent this year and to around one third of all mortgages in 2006. The whole mortgage pie will also be smaller. Freddie expects overall originations to decline by about 6 percent to $2.6 trillion in 2005 and to $2.3 trillion in 2006.