RealEstateEconomyWatch.com

Last year the gap between sales prices of REO properties and non-foreclosed homes grew dramatically in a number of the nation’s leading residential markets, suggesting that REO properties are increasingly discounting their prices and driving down home values at a faster rate.

A study by Lender Processing Services Inc., a leading provider of integrated technology and services to the mortgage industry, found that last year REO prices fell faster than local averages in a number of leading markets.

“While the gap between REO sales prices and the rest of the market was very slim prior to 2007, our study shows that gap is growing at an accelerating pace,” said Nima Nattagh, Ph.D., senior vice president, LPS Applied Analytics. “In general, markets that experienced sharp drops in home prices in 2008 also saw deeper REO discounts.”

The biggest discounts in the nation last year were in Riverside County, Calif., where REO prices fell by 34 percent, six percent more than the market average of 28 percent.

In some cases, the impact of REO discounts was dramatic. Home prices declined by 29 percent during 2008 in the Phoenix market. When REO sales were excluded from the analysis, the price decline was less severe at 19 percent year over year.

Even in markets where th

e overall price decline was not as great, like Cook County, Ill., REO sales were eight percent lower than normal home prices. Wayne County, Mich. saw a ten percent gap between REO properties and non-foreclosed properties.

The increasing REO discounts found in the LPS study may simply reflect buyers’ expectations and marketplace realities. A November survey by Harris Interactive for Trulia and RealtyTrac found that more than 75 percent of consumers think they should pay at least 25 percent less for a foreclosed home, with three in ten consumers expecting a major discount of at least 50 percent less than a comparable home not in foreclosure. The study also found that the number of US adults who would consider purchasing a foreclosed home fell 7 percentage points in only seven months.

The Harris study also found that negative perceptions of buying a foreclosure are growing. In April of 2008, 69 percent of U.S. adults originally felt that there were negative aspects to purchasing a foreclosed home. In November, 80 percent of U.S. adults were concerned with negative aspects, citing hidden costs, risky process, home losing value and personal connection with foreclosure as the core concerns. To compensate for perceived risks, consumers expect hefty discounts on foreclosed homes.

Deep discounts are news to many street Realtors who see more and more prime properties go on the market for a fraction of the former value. But sometimes banks clearly overreact. The Calculated Risk blog reports that a unit of Citigroup recently sold a foreclosure in Temecula, Calif. to an Arizona investment firm for $139,000 when comparable homes in the area were selling for $240,000 to $260,000. The firm then listed the home for $249,000, received multiple offers and the property has entered escrow.