Are Buyers Still Getting Discounts When They Buy a House?

It depends on what sort of house they are purchasing. Non-distress sales are those being sold by traditional sellers. In the last few months, the average discount in the Denver metro area was 2.5% off the last asking price. In many cases, the seller had to have a number of price reductions before they finally attracted an offer. This discount has been relatively stable for about two years.

On the other hand, the distress sellers have had a really different experience. “Distress” includes short sales and bank sales. You can see that the average discount for these properties was about the same as non-distress properties for much of 2005, 2006, and 2007. Starting in the middle of 2008, the banks got a little more realistic on their pricing AND demand for these properties greatly increased. Some of this was due to first time buyers but we think most of the demand increase came from investors competing for small rental homes. You can see that the average discount on the distress properties has steadily declined ever since.

Interestingly, in July of 2009, the distress properties sold at a modest PREMIUM to asking price, not a discount. This trend continued into August. The competition at the low end of the market is red-hot; many homes are selling in just a few days and there are often bidding wars driving prices above the asking price.

Does the speed to sell the distress property impact the price paid? Yes! [insert chart: 09-0907 Discount trends - REO segments] The bank properties that sell in less than five days are clearly the most sought-after. The premium these homes sell for continues to increase over time. In August 2009, they sold, on average, for 10.7% above the asking price.

We’re expecting the intense competition to continue for at least a few more months as first time buyers race the clock to take advantage of the tax credit. Eventually we’ll probably see more bank inventory hit the market and then prices will ease a bit.