Lender Processing Services Inc. (LPS), a provider of integrated technology and services to the mortgage and real estate industries, has announced the release of its nationwide study that reveals the impact of foreclosure sales, also known as real estate-owned (REO) sales, on home prices. "REO sales account for as much as 60 percent of housing activity in some states," said Nima Nattagh, Ph.D., senior vice president, LPS Applied Analytics. "Our study contains specific data to show this is causing precipitous drops in home values."
Michigan and Nevada are the highest ranking states in REO sales with more than 60 percent of home sales being REO sales in the first half of 2009. California and Arizona followed with REO sales comprising 50 percent.
In 2006, at the peak of the most recent housing boom, REO sales accounted for a little more than three percent of overall sales in California, the nation's largest housing market. Today, REO sales account for more than 52 percent of all sales in California. The Northeast and Northwest regions of the country do not appear to have been as hard hit as the West and Midwest states where a prevalence of sub-prime and exotic mortgage products, as well as general economic downturn, have elevated mortgage delinquencies to an all-time high.
"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," said Nattagh.
The LPS study also demonstrates that in states with a relatively high share of REO sales, the impact of these sales on the rest of the market has been much more pronounced. Using a unique and proprietary home price index (HPI) that gauges changes in the value of homes that have sold at least twice, LPS evaluated the influence of REO sales on regional housing markets. To do this, the LPS Applied Analytics HPI measures the changes in overall market values, as well as the change when REO sales are excluded.
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. However, when REO sales are included, the decrease in home prices approaches 47 percent.
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. When REO sales are included the home price decrease only climbs slightly to 19 percent.
"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," said Nattagh.
To review specific information supporting these findings, including state-specific charts, click here.
LPS Applied Analytics collects and compiles real estate public record data directly from the county assessor and recorder offices in jurisdictions that cover 89 percent of U.S. residential market activity. The database describes property characteristics, sales, mortgage financing and foreclosures. The LPS Applied Analytics' HPI uses a Repeat Sales Model, which is based on sale prices that have been compiled from the Recorder of Deeds. The model tracks changes in the value of homes that have sold at least twice and can include or exclude REO sales.
For more information, visit www.lpsvcs.com.