WASHINGTON – U.S. home sales are unlikely to recover before the second half of 2009, the Mortgage Bankers Association said in its latest economic forecast.

“We expect residential investment to decline further through the first half of 2009, due to the excess supply of houses and weakened demand from the recession,” Jay Brinkmann, the MBA’s chief economist and senior vice president for research and economics, said in a statement yesterday.

“A recession appears to be under way, as evidenced in rising unemployment, contracting manufacturing activity and declining inflation-adjusted consumption spending,” Brinkmann said. “Credit markets continue to be dysfunctional and the recent intensification of the credit crunch is hitting an already weakened economy.”

The trade group predicts the economy will continue to lose ground through the first half of 2009. “Unemployment will likely accelerate,” Brinkmann said, pushing the national jobless rate to as high as 7.7 percent by the end of next year, “and remain elevated through most of 2010 before heading down again.”

“A modest recovery” will begin in the second half [of next year], spurring “growth to pick up strongly by the end of 2009 and over the course of 2010,” the MBA said.

Despite the anticipated recovery, next year’s housing sales are likely to lag this year’s total, the MBA said. The trade group predicts that total residential mortgage production in 2009 will amount to $1.67 trillion, down from an expected $1.86 trillion in 2008 and $2.3 trillion in 2007. “Sales should increase by about 6 percent in 2010,” the group added.

For new-home sales, the outlook is gloomier. The MBA predicts U.S. sales of new homes this year will be down “about 36 percent relative to 2007. Sales are projected to bottom in the second half of 2009 and rebound modestly in the second half,” posting a full-year decline of about 12 percent from the 2008 level. But an end is in sight: “Sales should increase by about 25 percent in 2010,” the group said.

The one sunny spot in the MBA’s near-term housing forecast was in interest rates, which the group said are likely to decline. “The rates on fixed-rate mortgages have picked up recently to near 6.5 percent, in response to policymakers’ programs for banks’ recapitalization and [the] insurance of financial institutions,” Brinkmann said. “We expect long-term rates to decline from their current levels as massive liquidity injections by central banks around the world and other policy actions work through the system and demand increases for long-dated debt.”

Nationwide, residential mortgage applications plunged last week, erasing their gains in the week ended Oct. 10 (READ MORE), the MBA said today in a separate report.

The trade group’s seasonally adjusted Market Composite Index – a measure of overall mortgage loan application volume – registered 408.1 points in the week ended Oct. 17. That represented a decline of 16.6 percent from the preceding week’s 489.3 points and 44 percent compared with the same week a year ago.

Its seasonally adjusted Purchase Index fell 10.5 percent week-over-week to 280.6 points, after falling 0.3 percent the week ended Oct. 10 and rising 3.2 percent the week before that. The Refinance Index fell 23.5 percent last week to 1,158.8 points after rising 12.9 percent the preceding week and 0.9 percent the week ended Oct. 3.

The percentage of loan applicants who were looking to refinance dipped to 42.6 percent, from 46.4 percent the week before, the MBA said. The share seeking adjustable-rate mortgages (ARMs) – rather than conventional fixed-rate loans – increased to 2.7 percent from the previous 2.6 percent of total applications.

Applications fell despite a decline in the cost of fixed-rate mortgages, the trade group found. The average contract interest rate for a 30-year, fixed-rate mortgage fell to 6.28 percent last week from 6.47 percent the week before, and the contract interest rate on a 15-year, fixed-rate loan fell to 6.05 percent from the previous 6.17 percent; while the average contract rate on a one-year ARM rose to 6.97 percent from the preceding week’s 6.67-percent average.

The Mortgage Bankers Association is a trade group representing the real estate finance industry. Its 3,000 member companies include mortgage firms, commercial banks, thrifts, life insurance companies and others. Additional information, including the MBA’s Weekly Application Survey, is available at www.mortgagebankers.org.