Looking for a Deal on a Foreclosure? Try Pittsburgh.

Here at Zillow, we’ve assumed for a long time that, in most markets, buyers can get pretty good deals on foreclosures. Our chief economist, Dr. Stan Humphries, has called foreclosures and non-foreclosures two distinct markets — a comment that set off some debate in a previous blog post.

That debate prompted us to delve further into the issue, and today we’re releasing a white paper called “Price Differences Between Foreclosures and Non-Foreclosures.” It turns out that, in most markets, foreclosures and non-foreclosures do indeed constitute two distinct markets, with previously foreclosed homes regularly fetching much lower prices than non-foreclosed homes with similar attributes.

The extent of the “discount” for foreclosed homes varies by market.

Of the 16 markets we analyzed (using data from the end of the third quarter), the Pittsburgh metropolitan statistical area (MSA) showed the biggest discount for foreclosed homes, with buyers currently paying 59 percent less for foreclosures than they would for similar non-foreclosures.

However, there aren’t as many foreclosures to choose from in Pittsburgh as there are in some other markets. Ten percent of all sales in September were sales of previously foreclosed homes. That’s decreased even more, with 8 percent of sales in November being foreclosure re-sales.

On the other end of the spectrum was the Portland, Ore. MSA, where foreclosures typically fetched  18 percent less than non-foreclosures. Across all 16 markets, the average foreclosure discount was 28% (i.e., foreclosures sold for 72% of the price of a non-foreclosure. Here’s the full list:

A little about methodology: Our analysis attempted to control for physical differences in the homes, as well as differences in local markets that may exist between foreclosures and non-foreclosures (see the full methodology in the white paper). Without controlling for these factors, the discount for foreclosures was much larger, with foreclosures selling at a 42% discount compared to non-foreclosures.

The discount after controlling for differences between homes is probably the result of seller motivation (many sellers of foreclosed homes are banks), and the condition of the home (versus the physical specifications of the home, like number of bedrooms and bathrooms). Finally, the amount of foreclosure discount varies somewhat by how common foreclosures are in the metro area, but read the white paper for more about this relationship.