[Villages Kahuna]

If Fannie Mae and Freddie Mac are in as much trouble as is being reported we aren't anywhere near the bottom of home prices.

Basically, the problem is this...Fannie and Freddie guarantee a huge proportion of the home mortgages made in the U.S. The losses being incurred because of the flood of sub-prime loans and now the resulting foreclosures has placed the underlying capital of Freddie and Fannie under tremendous stress. I've heard several experts say that they're nowhere near insolvency, but the financial markets are reacting in a way that they will have a very difficult time raising the money they need to continue to do their business.

That means that mortgage loans will become very, very difficult to get. Only the absolute most creditworthy borrowers are going to be able to get loans. The basic protection that any lender seeks in circumstances like this is to reduce the "loan-to-value" ratio that they'll lend. So, if lots and lots of buyers who might like to buy a house can't get financing, or if they can only borrow 60 or 70% of the purchase price, the number of homes sold is going to decline precipitously. But there will still be home owners who absolutley have to sell their homes. That could include lenders who own homes from foreclosure, people who are transferred by their companies who have agreed to "underwite" the sale of the transferred emplyee's house, or people who have very low mortgages outstanding on their houses and are willing to sell at a very low price just to get out. All those types of circumstances result in much lower sales prices for houses. MUCH lower!

So much of the future of home prices and home sales rests on the willingness of lenders to make loans. And without Fannie or Freddie to guarantee those loans, I think you're going to find lenders sitting on the sidelines for quite some time to come. I think that there is a reasonable argument that can be made for a further precipitous drop in home prices in the next year or so.