Carrie Bay | 03.20.09

Jacksonville, Florida-based Lender Processing Services, Inc. (LPS), a provider of technology and services to the mortgage industry, has released the results of a recent study that reveals the impact of foreclosure, or REO, sales on home prices. Using LPS' newly developed, proprietary home price index that can include or exclude REO sales, the company conducted a study of changes in regional home prices between 2007 and 2008 in the nation's top housing markets.

LPS found that the largest drop in prices of REO sales were observed in Riverside County, California. Home prices fell by 28 percent in Riverside County in 2008 compared to the year before; however, including REO sales, prices fell by 34 percent on an annual basis.

The study also found that, including REO sales, home prices declined by 29 percent during 2008 in the Phoenix market, where analysts cite significant overbuilding. When REO sales were excluded from the analysis, though, the price decline was less severe at 19 percent year over year.

LPS reported that the gap between home prices with and without REO sales was smallest in Seattle, New York, and Cambridge, Massachusetts. The company says this is further evidence that the current downturn in the housing market is regional.

While the Western states, Michigan and Florida saw double-digit declines in home prices over the past year, other regions have fared much better. However, LPS says its study results show further deterioration in the housing market will most likely deepen the REO discount levels in these less-impacted markets as well.

Nima Nattagh, Ph.D., SVP of applied analytics at LPS, commented, "While the gap between REO sales prices and the rest of the market was very slim prior to 2007, our study shows that gap is growing at an accelerating pace. In general, markets that experienced sharp drops in home prices in 2008 also saw deeper REO discounts."

According to Nattagh, the ability to differentiate between the general trend in home prices and REO sales is important because it allows REO asset managers to make more informed decisions about disposition strategies. "Using our unique home price index, LPS provides a mechanism to separate the general trend in home prices from the trends in foreclosure and REO sales, enabling the industry to more accurately price REO properties and better monitor the health of the housing market," Nattagh explained.

Article derived from: DSNews.com