Homes that have been foreclosed or are in the process of foreclosure represented 25 percent of all home sales in the country during the third quarter of 2010 according to the quarterly U.S. Foreclosure Sales Report™ released by RealtyTrac on Thursday.  This is an increase of 1 percent  from the market share held by foreclosed properties during the second quarter.

During the quarter a total of 188,748 properties in some state of foreclosure – default, scheduled for auction, or bank-owned – sold to third parties.  This was a decrease of 25 percent since last quarter, reflecting an overall drop in sales following the expiration of the homeowners' tax credit at the end of June.

The volume of sales, however, is not the only measure of the impact of foreclosed homes on the real estate market.  Distressed homes sold, on average, at a 32 percent discount from the sales price of homes not involved in foreclosure.     In the 2nd quarter foreclosure discounts were 26 percent vs. 29 percent one year ago.  Perhaps the good news here is that this was a reflection of an improvement in the general market more than an indication of falling prices in the distressed market.  The average sales price of a foreclosure impacted property was $169,523, 2.3 percent lower than in Quarter 2 and 0.44 percent less than a year earlier while the price of market value home was $249,721, 6.42 percent higher than the previous quarter and 4.36 percent higher than the third quarter of 2009.

The bulk of the distressed properties, 113,933, were sold out of bank inventories (REO).  This was a decrease of 26 percent from Q 2 and 35 percent from Q3 2009.  In terms of market share, these properties represented 15 percent of sales, essentially the same as in the two previous quarters referenced in the report.  The discount for REO was 41 percent compared to 34 percent in Q2 and 35 percent a year earlier.

A total of 74,815 pre-foreclosure properties - in default or scheduled for auction – which are generally thought of but are not necessarily short sales where the bank accepts less than the amount it is owned, sold to third parties in the third quarter, down nearly 24 percent from both the previous quarter and year-over-year.  Pre-foreclosure sales accounted for nearly 10 percent of all sales, up slightly from 9 percent in both the previous quarter and in the third quarter of 2009.  Buyers received a much smaller discount on their pre-foreclosure purchases - an average of 19 percent – than in REO sales but it was an increase from the average discount of nearly 13 percent in the previous quarter and 18 percent in the third quarter of 2009.

“The expiration of the homebuyer tax credit in the second quarter created a substantial dip in overall buyer demand in the third quarter,” said James J. Saccacio, chief executive officer of RealtyTrac. “Demand for foreclosures also dipped in the third quarter, but those who did purchase a short sale or REO during the quarter were able to get an average discount of more than 32 percent — the highest average foreclosure discount we’ve seen since the fourth quarter of 2005.

“The foreclosure-processing controversy, which was brought to light at the very end of the third quarter, could chill demand even further — particularly for foreclosure properties,” Saccacio continued. “A quick but responsible resolution to that issue would be ideal to help the market continue to properly clear out foreclosure inventory and get distressed properties into the hands of qualified buyers and investors who will likely add value to those properties and the neighborhoods they are in.”

As usual the highest percentage of foreclosures sales were posted in Nevada, Arizona, and California at 54 percent, 47 percent, and 40 percent respectively, but these numbers were lower in all three cases from both the previous quarter and the previous year.  The discount from conventional sales prices in Nevada was 19 percent, in Arizona 25 percent, and in California 39 percent.  Other states where foreclosure sales accounted for at least one-quarter of all sales were Florida (37 percent), Massachusetts (35 percent), Michigan (32 percent), Georgia (29 percent), Oregon (27 percent), Idaho (25 percent) and Illinois (25 percent).  The largest discounts were posted in Ohio (42 percent), Kentucky (44 percent) and Tennessee (42 percent).