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Foreclosure Discounts Vary by Market

First American study analyzed sales in 629 counties

November 2, 2005


photo of Coco Salazar

A new study by a mortgage vending giant found lenders in some markets regularly accept much deeper discounts when selling foreclosed properties than others.

First American Real Solutions announced its Residential Foreclosures: The Prevalence, the Power and the Opportunity study quantified the correlation between foreclosures as a percentage of total sales across 629 counties in 36 states and the size of the discount buyers typically receive when purchasing foreclosure properties.

For example, in Maricopa County, Ariz., where foreclosure sales represented 1.6 percent of total sales during the first half of the year, the median discount was 6.3 percent as the market slowed and grew the discount rate from the 2.2 percent in the second half of 2004. While in St. Louis, Mo., foreclosures made up 7.9 percent of sales for the same time period, with a median discount of 29.5 percent, according to the report.

"The prevalence of foreclosures and the depth of discounts are sensitive indicators of the present and future state of a real estate market, regardless of geographic location or market type," said Christopher Cagan, First American's director of research and analytics, in the announcement.

Of the overall residential property sales recorded in the counties, approximately 1.3 million were normal market sales, meaning not sold by a foreclosing lender, and 35,000 were foreclosure sales, the report said. The median foreclosure discount was 12.5 percent below the normal market value of the properties.

Among the areas with few foreclosure sales and little or no foreclosure discounts during the first half of 2005 were California, Florida and Nevada, where prices soared in some of their markets during the period, and the District of Columbia, Hawaii, New Mexico, Virginia, and Arizona, First American said.

States where foreclosures were most prevalent and discounts were deepest included Michigan, New York, Ohio, South Carolina, Tennessee, but "the situation was perhaps most serious in Missouri," First American said. Foreclosure sales reportedly constituted 8.7 percent of the market in counties analyzed in Missouri, with St. Louis County leading in foreclosures, and median foreclosure discounts exceeded 30 percent.

"This comprehensive, nationwide analysis helps businesses identify areas where foreclosures are more frequent, and that helps them make more informed decisions," First American said.

The study reportedly also confirmed that foreclosure properties are priced lower than non-foreclosure prices because foreclosures are more frequent for lower-priced residences than for higher-priced homes and because the "more prevalent that foreclosures are in a market, the deeper must a foreclosing lender discount these properties to resell" their "larger inventory of lower-priced foreclosure properties than is necessary to dispose of the smaller number of more desirable higher-priced homes."

Coco Salazar is an assistant editor and staff writer for MortgageDaily.com.

E-mail: [email protected]

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