The gap between REO sales prices and the rest of the market is growing at an accelerating pace, according to a recent study by Lender Processing Services, Inc., released Thursday. In general, markets that experienced sharp drops in home prices in 2008 also saw deeper REO discounts, revealing the impact of foreclosure sales on home prices, the study said. The home price index by LPS provides a mechanism to “separate the general trend in home prices from the trends in foreclosure and REO sales,” said Nima Nattagh, senior vice president, LPS Applied Analytics. “The ability to differentiate between the general trend in home prices and REO sales is important and allows REO asset managers to make more informed decisions about asset disposition strategies.” The largest drop in prices of REO sales were observed in Riverside County, California, where home prices fell 28 percent between 2007 and 2008; however, including REO sales, prices in Riverside County plunged a significantly higher 34 percent from 2007 to 2008. The study also found that, including REO sales, home prices declined by 29 percent during 2008 in the Phoenix market, where analysts cite considerable overbuilding. When REO sales were excluded from the analysis, though, the price decline was much less severe at 19 percent year-over-year. The gap between home prices with and without REO sales was smallest in Seattle, New York and Cambridge, Massachusetts, offering further evidence that the current downturn in the housing market is regional. While the Western states and Michigan and Florida saw double-digit declines in home prices, other regions have fared much better. But based on study results, further deterioration in the housing market will most likely deepen the REO discount levels in these markets, the study’s report concluded. Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade