Foreclosure Home Prices 28% Lower, Form 'Distinct Market'

ForeclosuresPrices of foreclosed homes across the nation are 28 percent lower on average compared to non-foreclosed homes, and those homes seized by banks differ enough to form a “distinct market,” according to a study by Zillow.com, the real estate valuation and data site.
The gap in prices across the cities reviewed is “rarely less than a 20 percent discount for foreclosures,” Zillow said.
The motivating force for Zillow’s study was not necessarily pinpointing the cities with the best bargains, but to ascertain that “foreclosures and non-foreclosures do constitute two distinct markets,” said Stan Humphries, Zillow chief economist.
The types of homes in foreclosure “do differ in meaningful ways from the types of homes that sell conventionally…This is precisely the reason that we don’t include foreclosure re-sales in the computation of our home valuations and, therefore, don’t consider them in the Zillow Home Value Index,” Humphries concluded.
Humphries conceded that overall home values are influenced by foreclosures and suppress the prices of non-seized homes.
“But looking at foreclosures prices when trying to make evaluations about non-foreclosure prices will give one a skewed picture of both home and local real estate values,” he said.
Zillow’s study found that Pittsburgh had the biggest discounts, with foreclosure prices running 59 percent less than those of non-foreclosed homes. Zillow looked at 16 metropolitan areas. Portland, Oregon had the smallest foreclosure discount at 18 percent, Zillow said.
“It appears that more foreclosures in an area do lead to a smaller gap between foreclosure and non-foreclosure prices,” Humphries said.
Zillow studied price discounts in the third quarter of 2009.
Zillow’s analysis took into consideration physical differences in the homes, as well as differences in local markets that may exist between foreclosures and non-foreclosures.
“Without controlling for these factors, the discount for foreclosures was much larger, with foreclosures selling at a 42 percent discount compared to non-foreclosures,” said Katie Curnutte, Zillow PR Manager.
Click here for Zillow.com’s white paper on the subject.

Leave a Reply

Your email address will not be published. Required fields are marked *