Lender Processing Services Inc. (LPS) has released of a study that reveals the impact of foreclosure sales on home prices.
Using its proprietary home-price index that can include or exclude real estate owned (REO) sales, LPS conducted a study of changes in regional home prices between 2007 and 2008 in the nation's top housing 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,’ says Nima Nattagh, Ph.D., senior vice president at LPS Applied Analytics. ‘In general, markets that experienced sharp drops in home prices in 2008 also saw deeper REO discounts.’
The largest drop in prices of REO sales were observed in Riverside County, Calif. Home prices fell by 28% in Riverside County in 2008 versus 2007; however, including REO sales, prices fell by 34% when compared to 2007.
‘The ability to differentiate between the general trend in home prices and REO sales is important and allows REO asset managers to make more informed decisions about asset disposition strategies,’ says Nattagh.
The study also found that, including REO sales, home prices declined by 29% during 2008 in the Phoenix market, where analysts cite significant overbuilding. When REO sales were excluded from the analysis, though, the price decline was less severe, at 19% year over year.
The gap between home prices with and without REO sales was smallest in Seattle, New York and Cambridge, Mass., offering further evidence that the current downturn in the housing market is regional. While the Western states and Michigan and Florida saw double-digit declines in home prices, other regions have fared much better.
However, based on study results, further deterioration in the housing market will most likely deepen the REO discount levels in these markets, LPS says.