REO price cuts; what is “market value”?

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Good morning. As Leo Nordine told us earlier in the week, banks are finally starting to smell the coffee and cut prices on foreclosed homes in greater L.A. The Daily News: ‘Try finding a foreclosure because you might snap it up for about 20 percent or more under its recent market value. Take a foreclosed home in Winnekta on the market for $404,900. The asking price is 24 percent lower than what the former owner paid in June of 2006, according to Realtor Steve Smallson.’

More: ‘Market research firm Geostat Advisory’s analysis of the Los Angeles and Orange County residential real estate markets suggest lenders that repossessed homes and condominiums are slashing sale prices similar to the discount offered on Smallson’s listing.’

Our take: This is a tricky topic -- the idea that some houses are priced at a ‘discount,’ or ‘below market value.’ If ten identical houses are for sale on the same block, all listed at $500,000, and one seller drops his price to $450,000, is he offering at ‘below market value?’ No, he’s not. We don’t know what the market value is until someone buys one of the houses. The value could be $425,000, and everybody, including the price cutter, is priced above it. To further complicate things, if the market value is declining, it doesn’t necessarily matter what the first house sells for -- the ‘market value’ for the other nine is going to be lower. The longer they sit on the market, the lower their ‘market value’ is.

The article, as we read it, tries to steer clear of this trap; it defines ‘discount’ in relation to the previous sales price, as in the first example. It also uses the phrase ‘recent market value’ -- which refers back to that previous sales price.

Your thoughts? Insights? Email story tips to lalandblog@yahoo.com.
Hat tip: Cal