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November 18, 2011

Foreclosure Price Discounts and Market Distress

In this quarterly update, we provide the latest data on price discounts in foreclosure sales. Using a market value-based approach, we compare a distressed property’s foreclosure sale price to its estimated market value, i.e., how much the property would have been sold for had it not gone through the events of mortgage default and foreclosure. The size of the discrepancy, or foreclosure price discount, underscores the impact of market distress and foreclosure activities on property values.

One of our key results shows that market value-based foreclosure price discounts are generally smaller for many of the hardest-hit markets where the underlying property values have dropped significantly.

Perceived price over-corrections likely have attracted investors of distressed properties, driving up prices at foreclosure auctions and narrowing the gap between foreclosure sale prices and estimated market prices. In addition, the significant impact of the foreclosure market has also likely lowered the prices for all properties thus closing the gap.

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