Want a 32% Discount on a Home? Buy a Foreclosure

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Savvy home buyers scooped up amazing deals on defaulted homes in the third quarter. The national average foreclosure sale discount widened to 32% nationally, according to foreclosure data specialist RealtyTrac. That's up from 26% in the second quarter. But discounts that deep aren't likely to last.

So what caused the bigger deals in the second quarter? Home buying demand was extremely weak. Foreclosure sales actually declined by 25% from the quarter prior, even though the stream of foreclosures remained relatively steady.

This quarter, prospective buyers of properties in foreclosure shouldn't expect the discounts to be quite as deep. Although demand remains relatively weak, supply has also shrunk as foreclosure delays have slowed the rate at which defaulted homes hit the market. The discounts will probably continue to be relatively steep, however, as long as buyer demand remains low.

Here's a breakdown of the foreclosure sale statistics for the states where foreclosed on homes accounted for the highest percentage of total sales:

foreclosure sales 2010-q3.png

The peculiar trend noted last quarter continues here. Even though foreclosures make up a huge portion of total sales for the top five states shown, the discounts are relatively low for four of those five. That must mean that the buyers of homes in foreclosure are a relatively larger population in these regions, as bidding competition must be keeping prices relatively higher.

You can see from the above chart that time to get a great deal on a home is really after the bank repossesses it ("REO"). The national discount during that stage of foreclosure is more than 40%, while the price break in earlier stages is only around 20% on average. With discounts like this, it's hard to imagine why anyone would bother buying homes that aren't in some stage of foreclosure as long as there's sufficient inventory to go around.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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