The national average discount on foreclosures has shrunk by 1.4 percentage points over the past year as competition for foreclosures as inventories tighten is driving prices closer to full-price properties.

Homebuyers nationwide in September could expect a discount of 7.7 percent when buying a bank-owned property (REO) versus the same home in a non-distressed sale, according to a new Zillow analysis.

The discount narrowed from 9.1 percent during the same month last year and has fallen dramatically from a peak national discount of 23.7 percent in August 2009. Zillow compared the actual sale price of foreclosed homes nationwide to the estimated price of the same home were it to sell in a non-distressed transaction.

While foreclosure sales continue to offer buyers discounts over traditional sales in the majority of metro areas, some of the areas hardest hit by foreclosures are also those where the price gap between foreclosed and non-foreclosed homes is the smallest. Areas with the smallest foreclosure discounts in September were Phoenix (0 percent), Las Vegas (0 percent), Sacramento, Calif. (0.7 percent) and Riverside, Calif. (1.8 percent), Zillow found.

“The smallest foreclosure discount is found in places where competition for homes is so high, people there are willing to pay the same amount for a foreclosure re-sale that they would for a non-distressed home simply to take advantage of historic affordability,” said Zillow Chief Economist Dr. Stan Humphries. “Additionally, in areas such as Phoenix and Las Vegas, where not long ago one out of every two homes sold was a foreclosure re-sale, buying a foreclosure is no longer just for investors.”

Metro areas with the biggest foreclosure discounts include Pittsburgh (27.4 percent), Cleveland (25.8 percent), Cincinnati (20.2 percent) and Baltimore (20 percent).

Year-over-year foreclosure discounts fell in roughly three-quarters (76.9 percent) of metro areas analyzed, and all metros are down from their peak. Nationwide, foreclosure discounts reached their height in 2008 and 2009, and in some areas peaked at more than 30 percent.

As recently as the second quarter of this year, RealtyTrac reported that the national average price of bank-owned properties was 32 percent lower than the average price of a non-foreclosure home, a slight improvement from a 30 percent discount in the first quarter and also a 30 percent discount in the second quarter of 2011.

One reason for the great difference is the way the two organizations calculate the discount rate is calculated. Zillow’s discount rate is the result of comparing the sale price of a foreclosure to the estimated, non-distressed sale price of the same home. Other reports like RealtyTrac compare the median sale price of all foreclosures sold in a given period with the median sale price of all non-foreclosures sold in the same period.