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March 04, 2011

Market Value-Based Foreclosure Discount on Foreclosed Properties

Within illiquid housing markets, the distressed market segment typically behaves very differently than the non-distressed. Available measures of foreclosure discount compare median sales price on foreclosed properties to the median price of non-distressed sales. While useful as a general indicator of market distress, they are imprecise measures of the impact of foreclosure events on the market-clearing prices of foreclosure sales.

In this report, we fill the gap by providing a market value-based measure of foreclosure discount. Specifically, we estimate the amount of price discount relative to the underlying market value of the property at the time of foreclosure. By comparing the foreclosure price to the underlying market value of the property, that is, the market price the seller would receive should it be sold under normal circumstances, we provide a true estimate of foreclosure discount which can be used to gauge more reliably the impact of foreclosure on the price of foreclosed homes.

This is the first published industry estimate of the foreclosure discount using market value estimates.

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