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Not only did the number of foreclosures grow during the third quarter, so too did the "foreclosure discount," the difference between the average price of foreclosed properties and properties for sale that are not in foreclosure.

Foreclosure Discount Grows, Home Values Fall

Not only did the number of foreclosures grow during the third quarter, so too did the “foreclosure discount,” the difference between the average price of foreclosed properties and properties for sale that are not in foreclosure.

The average sales price of properties that sold while in some stage of foreclosure was more than 32 percent below the average sales price of properties not in the foreclosure process. The discount is the highest since the fourth quarter of 2005 and is up from a 26 percent discount in the previous quarter and a 29 percent discount in the third quarter of 2009 according to RealyTrac’s third quarter report released today.

The large foreclosure discount puts pressure on home prices and values. The double whammy of the discount plus some 2 million properties in the foreclosure process contributed to a 3.4 percent decline in overall home prices during the third quarter and a 1.6 percent decline, year over year, according to the Case-Shiller Price Index.

In the two months that have passed since the quarter ended, early indications are that prices have fallen farther due to slack demand. Altos Research, for one, had October prices down 1.6 percent in its 10-city composite. Many forecasters expect foreclosures will continue to drive prices down farther in the first half of next year.

Like demand for non-foreclosed properties, demand for foreclosures has declined over the summer and fall. The number of properties in some stage of foreclosure – default, scheduled for auction or bank-owned (REO) – that sold to third parties in the third quarter decreased 25 percent from the previous quarter and nearly 31 percent from the third quarter of 2009. The average sales price of properties in some stage of foreclosure was $169,523, down 2.46 percent from the previous quarter and down 0.44 percent from the third quarter of 2009.

“The expiration of the homebuyer tax credit in the second quarter created a substantial dip in overall buyer demand in the third quarter,” said James J. Saccacio, chief executive officer of RealtyTrac. “Demand for foreclosures also dipped in the third quarter, but those who did purchase a short sale or REO during the quarter were able to get an average discount of more than 32 percent – the highest average foreclosure discount we’ve seen since the fourth quarter of 2005.”

“The foreclosure-processing controversy, which was brought to light at the very end of the third quarter, could chill demand even further – particularly for foreclosure properties,” Saccacio continued. “A quick but responsible resolution to that issue would be ideal to help the market continue to properly clear out foreclosure inventory and get distressed properties into the hands of qualified buyers and investors who will likely add value to those properties and the neighborhoods they are in.”

Foreclosure sales accounted for nearly 54 percent of all sales in Nevada in the third quarter, the highest percentage of any state but down from nearly 56 percent of all sales in the previous quarter and 62 percent of all sales in the third quarter of 2009. Both pre-foreclosure sales and REO sales in Nevada were down from the previous quarter and from the third quarter of 2009. Nevada properties in some stage of foreclosure sold for an average discount of 19 percent in the third quarter.

Arizona foreclosure sales accounted for nearly 47 percent of all sales in the third quarter, the second highest percentage of any state despite a decrease of 27 percent from the previous quarter and a decrease of 32 percent from the third quarter of 2009. Arizona properties in some stage of foreclosure sold for an average discount of 25 percent in the third quarter.

Foreclosure sales accounted for nearly 40 percent of all sales in California in the third quarter, the third highest percentage nationwide but down from 43 percent of all sales in the previous quarter and nearly 52 percent of all sales in the third quarter of 2009. California foreclosure sales were down nearly 27 percent from the previous quarter and down 43 percent from the third quarter of 2009. California properties in some stage of foreclosure sold for an average discount of nearly 39 percent.

Other states where foreclosure sales accounted for at least one-quarter of all sales were Florida (37 percent), Massachusetts (35 percent), Michigan (32 percent), Georgia (29 percent), Oregon (27 percent), Idaho (25 percent) and Illinois (25 percent).

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