While the gap between REO sales prices and the rest of the market was very slim prior to 2007, a new study from Lender Processing Services (LPS) in Jacksonville, Fla. shows that gap is growing at an accelerating pace.

Using LPS' newly developed, proprietary home price index that can include or exclude real estate owned sales, the company conducted a study of changes in regional home prices between 2007 and 2008 in the nation's top housing markets.

"In general, markets that experienced sharp drops in home prices in 2008 also saw deeper REO discounts," said Nima Nattagh, senior vice president, LPS Applied Analytics.

The largest drop in prices of REO sales were observed in Riverside County, Calif. Home prices fell by 28% here in 2008 versus 2007; however, including REO sales, prices fell by 34% when compared to 2007. Home prices declined by 29% during 2008 in Phoenix where analysts cite significant overbuilding.

When REO sales were excluded from the analysis, though, the price decline was less severe at 19% year over year.

The gap between home prices with and without REO sales was smallest in Seattle, New York and Cambridge, Mass. While the Western states and Michigan and Florida saw double-digit declines in home prices, other regions have fared much better.

But further deterioration in the housing market will most likely deepen the REO discount levels in these markets, the study said.

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