Just as they had a year earlier, foreclosure and pre-foreclosure sales made up nearly one-fifth of the residential home sales in the third quarter of 2012.  According to RealtyTrac's Q3 U.S. Foreclosure and Short Sales Report^TM released on Thursday, 19 percent of home sales nationally were either bank inventory (REO) or properties pre-foreclosure.  These are usually short sales in which the bank agrees to accept less than the full mortgage balance to release its lien.  This share is identical to that in the third quarter of 2011 and only one percentage point lower than in the second quarter of 2012.

There were a total of 193,059 U.S. properties sold through short sales or out of bank-owned inventories (REO), up 21 percent from sales in the second quarter and three percent lower than one year earlier. Unlike in earlier quarters short sales outnumbered REO sales by 98,125 to 94,934.   Pre-foreclosure sales were 22 percent higher than in both the previous quarter and in the third quarter of 2011.  Sales of REO increased 19 percent from the previous quarter but were still down 20 percent from the third quarter of 2011.

RealtyTrac reports that an additional 22 percent of residential sales were short sales of properties for which the foreclosure process had not yet begun.  This brought the market share of distressed properties to an estimated 41 percent, an increase of 15 percent from the second quarter and 17 percent from one year earlier.

Distressed homes sold at an average discount of 32 percent from the price of a market sale.  The discount had been 29 percent in the second quarter and 31 percent in the third quarter of 2011.  The discount on short sales was 27 percent compared to 25 percent the previous quarter and 19 percent a year earlier while the discount on REO was 38 percent, 5 percentage points higher than the second quarter but lower than the 39 percent discount one year earlier. 

The average sales price of a short sales was $191,025.  Banks forgave an average of $94,896 on pre-foreclosure short sales and $82,312 per short sale of homes that were not in foreclosure.  REOs sold for an average price of $161,954, down 7 percent from the previous quarter but up 7 percent from the third quarter of 2011.

"The shift toward earlier disposition of distressed properties continued in the third quarter as both lenders and at-risk homeowners are realizing that short sales are often a better alternative than foreclosure," said Daren Blomquist, vice president of RealtyTrac. "However, the scheduled expiration of the Mortgage Forgiveness Debt Relief Act at the end of this year could stifle this trend toward short sales. If that law expires as scheduled, homeowners who agree to a short sale could see their income tax jump significantly because the portion of the unpaid loan balance not covered by the short sale proceeds will be considered taxable income in many cases.

"The prospect of being taxed on potentially tens or hundreds of thousands of dollars in additional income may motivate more distressed homeowners to forgo a short sale and allow the home to be foreclosed," continued Blomquist. "Additionally, if the mortgage interest deduction is eliminated due to the fiscal cliff quagmire, it would give many underwater and otherwise distressed homeowners one less reason to hang on to their homes."

Short sales took an average of 359 days to sell after entering foreclosure, up from 319 days in the second quarter and REOs were sold on average 186 days after being foreclosed, up from 195 days in the previous period. 

Georgia had the highest percentage of distressed sales, a 38 percent market share.  This was down from 41 percent the previous quarter.  Pre-foreclosure sales were up 40 percent and REO sales 4 percent.  Non-foreclosure short sales increased 32 percent on an annual basis and accounted for an estimated 18 percent of all residential sales in the third quarter.

Foreclosure related sales accounted for 36 percent of residential sales in California and 34 percent in Arizona despite annual declines of 12 percent and 28 percent respectively.  In both cases REO sales declined by large amounts (37 percent in California and 49 percent in Arizona) while short sales of both pre-foreclosure and non-foreclosure properties were up significantly.