Foreclosure Sales and Home Prices

Real estate research firm Lender Processing Services has released an interesting look at the impact of foreclosure sales on home prices on a state-by-state basis. "REO sales account for as much as 60 percent of housing activity in some states," Nima Nattagh, Ph.D., of LPS Applied Analytics, said in a press release. "Our study contains specific data to show this is causing precipitous drops in home values."

The study highlights the significant discrepancies in the levels of foreclosure sales between states that have been hammered by the housing crash and those that avoided the brunt of its force. "While REO sales activity has increased significantly across all regions in the country, there is clearly a dichotomy between states that have seen unprecedented levels of mortgage delinquency and those where the impact of the current housing crisis has been much more moderate," Nattagh said.

Not surprisingly, LPS found that higher levels of foreclosure sales can drive home prices in a given market sharply lower. "This study clearly shows that when foreclosure levels are high and REO sales dominate the majority of transactions, their impact on the rest of the market should be taken into account accordingly," Nattagh said. To illustrate this trend more clearly, here's a look at the impacts of foreclosure sales on home prices in two different states: Michigan and Massachusetts.

Michigan: Along with Nevada, Michigan led the nation in REO sales as a percentage of total sales in the fist six months of this year. More than 60 percent of all sales in the state were REO sales during that period. The ex-housing-boom hotspots of California and Arizona also witnessed a great deal of distressed sales activity, with REO sales representing more than 50 percent of all sales during the period.

"In Michigan, where REO sales accounted for 64 percent of sales in the first six months of 2009, non-REO home prices have dropped by more than 26 percent since their peak in 2005," LPS said in its report. "However, when REO sales are included, the decrease in home prices approaches 47 percent."

Massachusetts: Meanwhile, states located in other parts of the country—such as Massachusetts—have avoided elevated levels of foreclosure sales.

"In contrast, in Massachusetts, where only 14 percent of homes sold the first six months of 2009 were REO sales, home prices, excluding REO sales, have dropped by 15 percent," LPS said in its report. "When REO sales are included the home price decrease only climbs slightly to 19 percent."