Fannie Mae (FNM), the No. 1 U.S. mortgage finance company, Wednesday raised its forecast for U.S. home sales this year, after higher-than-expected sales in the first half of 2004, a drop in mortgage rates last week to 4 1/2-month lows, and a rise in home-loan applications.

Fannie Mae (search) now expects 2004 sales of new homes to rise by 7.7 percent over last year to 1.17 million units, while existing home sales are expected to increase by 4.8 percent to 6.39 million units, the Washington, D.C.-based company said in a monthly economic outlook.

In July, Fannie Mae forecast 2004 new home sales of 1.ae said.

The Mortgage Banker's Association (search), a Washington trade group, said Wednesday its purchase index, a gauge of new loan requests for home purchases, rose in the week ended Aug. 13 by 6.2 percent to 467.1 from 440.0 in the previous week.

The MBA's seasonally adjusted market index, a measure of mortgage activity, rose for last week by 11.9 percent to 689.4 from the previous week's 616.1.

Rates on 30-year mortgages fell last week to their lowest level in over four months, the MBA said.

Thirty-year mortgage rates, excluding fees, averaged 5.75 percent, down 0.05 percentage point, or 5 basis points, from the previous week, and down 0.47 percentage point, or 47 basis points, from a year ago, the MBA said. (A basis point, used to measure yield, is 0.01 percent.)

The rates on 30-year mortgages had not been this low since the week of April 2, when they also averaged 5.75 percent, according to the MBA.

Next year, though, is a different story.

Fannie Mae said it expects interest rates to be high enough in 2005 to slow housing sales.

"We project home sales declines of around 12 percent next year, which would still leave sales at their third-highest levels ever, after 2004 and 2003."

Fannie Mae also said it expects average home prices to rise by about 7 percent in 2004 over 2003, which would make 2004 the fifth consecutive year of price gains in the range of 7 percent to 8 percent a year.

But by 2005 and the next few years, Fannie Mae expects the annual increase in home prices to slow down somewhat.

"We now project a rise in the (Office of Federal Housing Enterprise Oversight (search)) home price index of around 4 percent in 2005-2007, and this may include some modest declines in prices in some of the highest cost areas -- especially if job growth remains relatively weak in those markets," Fannie Mae said.