Video: Price Differences Between Foreclosures and Non-Foreclosures

If you don’t have time to read Zillow Chief Economist Dr. Stan Humphries’ 15-page white paper on “Price Differences Between Foreclosures and Non-Foreclosures,” watch this three-minute video with conclusions of his findings. 

> See which city offers the biggest discount on foreclosures.
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Transcript courtesy of PhoneTag:

INTERVIEWER: I’m here with Dr. Stan Humphries, Zillow’s Chief Economist, and we’re talking about what’s happening in the housing market. So, Stan, this week, you released the white paper analysis that you did on foreclosure sales. Can you tell me what conclusions you reached, what did you find?

Mr. STAN HUMPHRIES (Chief Economist, Zillow): Yeah, we started analysis looking at the discount that you see on foreclosures relative to non-foreclosure home sales. And we started the analysis because there were so much discussion in the broader public about the fact that in areas where you have lots of foreclosures does that mean that non-foreclosure prices basically had to come down to meet the foreclosure price. So, we did a study where we basically looked at various metropolitan areas and looked at controlled for – controlling for the location of the home and the physical specifications of the home. Is there still a difference after you control for these factors between whether home sales as a foreclosure resale versus a traditional resale? And what we found was that there is still a large gap between those two methods of selling with foreclosures that typically had any discount of about 28% off of a non-foreclosure price across all the metropolitan areas we looked at. And that discount did vary according to – somewhat vary according to the prevalence of foreclosures in that area. So, areas that had a lot of foreclosures did see less of a discount but even in those areas, we never saw the discount fall below 20%.

INTERVIEWER: So, does that mean buyers can get a good deal, generally speaking, who are buying foreclosures?

Mr. HUMPHRIES: Absolutely, yeah. I mean, foreclosures are, you know, again control of everything else. They’re cheaper than non-foreclosures. The reason they’re cheaper is – there are few different factors that drive these prices lower. One, you have a very motivated seller who’s typically the bank. They are willing to hold on to that property less than perhaps a traditional seller who can wait out longer or just choose not to sell the house if the prices have met. Banks will eventually want to get that come off their books. Typically, the condition of foreclosures is inferior to non-foreclosures and there are also some legal issues with foreclosures that may explain why their prices are less. Things like you don’t have a seller who’s been on the house who can give you disclosure about things that may have happened to that house and various uncertainties will create a discount in that pricing as well. But certainly, they’re not – you know, foreclosures have been, you know, tremendous value for a lot of home buyers and that the fact that there are cheaper inventory coming in to marketplace is of course what is driving them a lot of prices.

INTERVIEWER: And nationwide, what percent of all sales nowadays are foreclosure sales?

Mr. HUMPHRIES: Nationally right now, we’re looking at about 20% of transactions in the month of November were foreclosure resales. And that varies obviously enormously across the country. So, you look at markets – certain markets in California, Central Valley market of stock in Merced, that rate is still around 60 – 70 % of transactions are foreclosure resales. And you look into a market like Seattle or Portland and that rate is more in the 15% range.

INTERVIEWER: Thank you.

Mr. HUMPHRIES: You bet.