[Update 1: clarifies role of REO properties in index] Lender Processing Services‘ (LPS) newest home price index calculates the impact real estate owned (REO) properties have on regional homes prices. For instance, during the peak of the housing boom, less than 3% of home sales in California were REO transactions. Now, REO sales account for more than 52% of all sales in the state. In Michigan, another state hit hard by the crisis, REO sales account for 64% of sales during the first half of 2009. Non-REO home sales prices have dropped more than 26% since peaking in 2005, but when REO sales are included, that decrease is nearly 47%. But in states that aren’t experiencing as much of an increase in REO sales, like Massachusetts, where REO sales account for 14% of the state’s sales volume, non-REO prices have gone down 15%. When REOs are included, the decrease in price is 19%. “In some respects, the findings of this study are really not that surprising,” Nima Nattagh, senior vice president of LPS Applied Analytics told HousingWire. “The extent of which of what we’ve seen in the housing market is that it’s very much a regional phenomenon. The impact seems to be much more severe in certain states, while other states have not been as badly impacted.” While the study shows that home sales prices would be higher without REO properties included, it can’t predict changes in the volume or prices for non-REO sales if the REO properties weren’t on the market. And while REO sales are accounting for the lion’s share of sales activity, Nattagh said, there is no gauge of what percentage the balance of the transactions are short sales. “Clearly, if you exclude the REOs, the trend in prices is different because REOs are selling at a discount,” Nattagh said. “The real point is to show that if you have a high volume of REO sales, that is in fact the market, and therefore you should be relying on indices that take into account REO sales.” The difference in sales prices with and without REO sales is a critical component to the argument among many appraisal professionals on whether REO sales should be a factor in appraisals. “You can make that argument very strongly in California, Florida, Michigan and Arizona, but perhaps you can’t make that argument as strongly in places like Seattle, New York, Massachusetts, or Connecticut because the REO volume is not the dominate factor in the market,” Nattagh said. Another uncertainty, Nattagh said, is whether the housing market really has bottomed out, as many have predicted. “It’s still too early to say that the market has stabilized and accordingly, we’d like to see at least another three or four months of data to have a better read on the market,” he said. Write to Austin Kilgore.