Author:
Saty Patrabansh
Abstract:
REO properties sell at a discount from normal houses. Various estimates of REO discount exist in the news and the housing finance literature. This mortgage market note shows that the variation in the estimates of REO discount can be largely explained by how the discount is computed, i.e. which comparison property values are used. Often, estimates of REO discount are larger than the true discount because the estimates are also capturing difference in quality or condition of property; difference in characteristics, such as age and size; and difference in markets, such as location, time and house price growth rates. After accounting for such effects, the REO discount can then be further explained as effects of buyers' preferences, expectation about problems associated with REO properties or risk aversion; sellers' loss aversion; and general stigma surrounding REO sales. Understanding why REO properties are discounted and how the REO discount is measured in different contexts is important for policy discussions on REO inventories and their disposition.