Home sales and construction will improve this year, contributing “modestly” to economic expansion after acting as a drag on growth since 2006, according to a Fannie Mae forecast released today.

Sales of new and existing homes are likely to increase 3.5 percent and housing starts are projected to rise 16 percent, fueled by improvement in apartment development and a rebound in single-family house construction, according to the report by Douglas Duncan, Fannie Mae’s chief economist, and Orawin Velz, a director in its Economics and Mortgage Market Analysis group.

“With an expected improvement in housing activity in 2012, residential investment should start contributing to growth, albeit only modestly initially,” Duncan and Velz wrote.

The housing market has been held back by weak demand as high unemployment and concerns about job security prevent buyers from taking advantage of falling home prices and borrowing costs, Duncan said in an interview yesterday at Bloomberg’s New York offices.

“We see an incremental increase only in the number of residential units that get moved through sale,” Duncan said. “It’s another sort of holding pattern.”

Mortgage rates will continue to provide support for the market, rising only slightly in 2012, according to the report. The average rate for a 30-year fixed loan fell to 3.89 percent in the week ended yesterday, the lowest in records dating to 1971.

Originations to Decline

Mortgage originations in 2012 are expected to decline to $1.01 trillion from an estimated $1.36 trillion last year as refinancing “declines sharply,” according to the report. The refinancing portion is likely to drop to about 53 percent from about 66 percent last year because many homeowners have already taken advantage of lower rates, Duncan said.

The expansion this year of President Barack Obama’s three- year-old Home Affordable Refinance Program for Fannie Mae and Freddie Mac loans with little or no home equity will add about $200 billion to $300 billion to refinancings, Duncan said. This year’s expected decline in mortgage originations would be steeper without the expansion, he said.