Heavily discounted REO properties were a major jewel in the post-bubble housing downturn, but new analysis by Zillow suggests those benefits may be evaporating.

By Peter Ricci

There have been many unfortunate side effects to the housing downturn, but for homebuyers and agents who have been able to capitalize, there has been one decided benefit – heavily discounted REO properties, with price reductions exceeding 20, 30 and even 40 percent on some occasions.

Sadly, though, all good things must come to pass, and recent analyses by both Zillow and RealtyTrac suggest that the days of heavily-discounted distressed property sales may be numbered.

Discounted REO Properties – A Thing of the Past?

According to Zillow’s analysis, the discounts for REO properties have fallen quite dramatically in the last three years:

• In September 2012, homebuyers received an average discount of 7.7 percent when buying an distressed, bank-owned property, when compared to the same kind of property in a non-distressed sale.
• That’s down from 9.1 percent in September 2011, and really down from the 23.7 percent peak discount of August 2009.
• Even the housing markets awash with foreclosures and REO properties have seen a steep decline in the distressed property discount. In Chicago, the 11.9 percent discount in September 2012 is down from the 15.5 percent a year ago and the 28.0 percent from the December 2008 peak; in Miami, the discount has declined as well, falling from a August 2008 peak of 22.7 percent to 6.8 percent in September 2011 and, finally, just 2.9 percent in September 210.

Fierce Competition for REO Homes

The reason for the diminishing discounts, as HousingWire pointed out, is that there are not that many REO properties left for homebuyers and investors to purchase, and that in turn is ratcheting up the competition for the few remaining distressed properties.

Stan Humphries, Zillow’s chief economy, elaborated on that point.

“The smallest foreclosure discount is found in places where competition for homes is so high, people there are willing to pay the same amount for a foreclosure re-sale that they would for a non-distressed home simply to take advantage of historic affordability,” Humphries said.

And of course, we can’t lose sight of the fact that this is a very encouraging sign. The less distressed properties there are, the more balanced housing inventories will be, and the more ammunition housing will have for its recovery.