Rhody Trader

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I know I complained before about having to be on earnings release conference calls. I’m not changing my view. For the most part they are pretty dull - at least to me. Yesterday, though, I was sitting in on Fannie Mae’s (FNM) call, and it was pretty interesting. Well, parts of it were, anyway.

The thing that really grabbed my attention was the forecast for the eventual decline in housing prices. Firstly, they said that US home prices have a long-term price trend which basically matches GDP growth. When you think about it, that seems quite reasonable.

Having first made that statement, the Fannie officers then outlined their forecast that when the dust finally settles, housing prices will likely have dropped 15%-19% peak to trough. This is a revision after things accelerated in Q1. That would translate to more than 25% on the Case-Shiller index. Right now Case-Shiller is down just about 15% from it’s peak, so it look’s like we’ve got a ways to go yet if the Fannie folks are right. And of course there could be an overshoot to go below the GDP trendline.

A 25% drop in home prices means even traditional 20% down mortgages could start going into negative equity.

That no doubt plays into why Fannie has raised it’s loss provisions for 2008 and expects them to be even higher in 2009. In other words, the folks who know the US housing and mortgage market as well as anyone see a lot of ugly water ahead.

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