Declining REO inventory means less foreclosure discounts

By Sari R. Updated on 11/13/2012

Many U.S. metro areas currently have steep discounts on foreclosed properties (some as large as 27%) but the overall decrease isn’t as prominent as it seems.  This week, analysts placed the national foreclosure discount on properties that were distressed at a measly 7.7%.  What does this mean?  There are fewer foreclosures overall.  Last year, there was a yearly decrease in foreclosures in 131 out of 212 national metropolitan area, indicating that the housing markets have surpassed the worst part of the foreclosure problem.

Popular housing website Zillow likes to compare the foreclosure sales price to the non-distressed sale level of the same property.  Metropolitan areas such as Cleveland and Pittsburg have foreclosure discounts as steep as 25.8% and 27.4%.  The littlest foreclosure discount can be found in areas where home competition is high.  This is because individuals in these areas would pay the same amount for a foreclosure re-sale and a non-distressed home.  Not too long ago, in metropolitan areas such as Las Vegas and Phoenix, every other home was a foreclosure re-sale.  Today, buying foreclosures isn’t limited only to investors.  In Sacramento, the foreclosure discount is only a 0.7% difference from the area’s average property price.  In higher priced markets such as New York or Los Angeles, foreclosure discounts are 15.5% and 4.2%, respectively.  The national average for foreclosure discounts is currently 7%.

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