Fannie: Home prices to sink 4-5% in '08

NEW YORK (CNNMoney.com) -- Average home prices will decline another 4 to 5 percent in 2008, according to Fannie Mae Chief Executive Dan Mudd.

Mudd, speaking at Fannie Mae's first shareholders meeting in more than three years, said the mortgage-finance firm does not see a turnaround in the U.S. housing market until 2009 "at the earliest."

"Home sales are down, we expect more to come," Mudd said.

The median price of an existing home sold jumped 43 percent between 2001 and 2005, but year-over-year price declines started in late 2006 and are expected to fall almost 2 percent this year, according to the National Association of Realtors. That would mark the first year with a decline in prices.

The run-up in prices caused a problem with affordability in many markets, Mudd said, and prices need to retreat in order to restore affordability before a housing recovery can begin.

He blamed the growth in subprime mortgages that sparked the current credit market crisis on the affordability problems during the boom years.

"With the decrease of affordability, a lot of those products grew up to get payments down," he said. But he said that once home prices become more affordable, he expects the market to recover relatively quickly.

"There's a strong fundamental supply and demand under the market," he said.

He said the continued tough times ahead for housing and mortgage finance is the reason that Fannie (FNM) has had to take steps that have hit its share price recently, including cutting its dividend by 30 percent and the sale of $7 billion of preferred stock earlier this month to raise capital. It took the steps after reporting a $1.4 billion loss in the third quarter.

"We have to have a solid and conservative capital position to go into a market this challenging," he said.

Fannie Mae faced some criticism from shareholders at the meeting, none more so than gadfly individual investor Evelyn Davis, who dominated the questions and comments portion of the meeting, and advocated that the entire board of directors resign other than former FBI Director Louis Freeh.

"I'm a stockholder in 80 corporations. None of them have done as bad as Fannie Mae," she said. "It's time we get someone to clean up the situation."

Fannie shares gained 2 percent in trading Friday. But so far this year it has lost 40 percent of its value, which still puts it ahead of rival Freddie Mac (FRE, Fortune 500), which has seen its shares slide 52 percent year to date due to many of the same problems.