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Foreclosure discounts falling as home prices rise

Housing has shifted in the last year, with home prices rising, despite competitive pricing from foreclosures, but now, the discount buyers can get on foreclosures is falling.



A shifting real estate sector

According to Zillow, home buyers could expect a 7.7 percent discount when buying a foreclosure home versus the same home in a non-distressed sell, down from 9.1 percent in September 2011, and a dramatic slide from its August 2009 peak of 23.7 percent. Zillow compared the actual sale price of foreclosed homes nationwide to the estimated price of the same home were it to sell in a non-distressed transaction. Meanwhile, the National Association of Realtors reports accelerated improvement in increasing home prices.

Zillow reports that while foreclosure sales continue to offer buyers discounts over traditional sales in the majority of metro areas, some of the areas hardest hit by foreclosures are also those where the price gap between foreclosed and non-foreclosed homes is the smallest. Areas with the smallest foreclosure discounts in September were Phoenix (0 percent), Las Vegas (0 percent), Sacramento, Calif. (0.7 percent) and Riverside, Calif. (1.8 percent), Zillow found.

Housing affordability regionally

“The smallest foreclosure discount is found in places where competition for homes is so high, people there are willing to pay the same amount for a foreclosure re-sale that they would for a non-distressed home simply to take advantage of historic affordability,” said Zillow Chief Economist, Dr. Stan Humphries. “Additionally, in areas such as Phoenix and Las Vegas, where not long ago one out of every two homes sold was a foreclosure re-sale, buying a foreclosure is no longer just for investors.”

Metro areas with the biggest foreclosure discounts include Pittsburgh (27.4 percent), Cleveland (25.8 percent), Cincinnati (20.2 percent) and Baltimore (20 percent).

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Year-over-year foreclosure discounts fell in roughly three-quarters (76.9 percent) of metro areas analyzed, and all metros are down from their peak. Nationwide, foreclosure discounts reached their height in 2008 and 2009, and in some areas peaked at more than 30 percent.

Zillow says their estimates are different

By comparing the sale price of a foreclosure to the estimated, non-distressed sale price of the same home, Zillow has taken a new approach to answering the question, “How much can I save by buying a foreclosure?” Other reports compare the median sale price of all foreclosures sold in a given period with the median sale price of all non-foreclosures sold in the same period – an approach that does not control for issues such as size, location or other attributes of homes. Because foreclosed homes tend to be smaller and in lower-priced locations, prior research tends to overstate the discount on foreclosures relative to non-foreclosures. Zillow’s approach controls for those issues.

Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.

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