The impact of foreclosure home sales on house prices differs state by state, according to researchers of Lender Processing Services Applied Analytics.

The researchers contend that the percentage of sales of bank owned foreclosed properties or REOs is correlated with the rate of house price declines.

Nima Nattagh, one of the key LPS researchers, said that REO sales has risen significantly in almost all areas of the country, but there are some states where REO sales reached a stunning 60 percent of all home sales. She explained that housing markets are much more battered when foreclosures are unprecedented and REO sales comprised a big majority of total home sales.

The LPS researchers focused on two different states – Massachusetts and Michigan – to illustrate their contention.

Michigan was chosen as a representative of the battered housing market because the state, along with Nevada, had the highest percentage of REO sales in the first 6 months of the year. Over 60 percent of total home sales in Michigan were REO sales in the first 6 half of 2009.

The other battered housing markets, Arizona and California, also had large percentages of distressed sales and REO sales, but they had lower REO percentages than that of Michigan. Over 50 percent of total home sales in California and Arizona in the first 6 months were REO sales.

LPS reported that REO foreclosure home sales comprised 64 percent of total home sales in Michigan in the first 6 months. This rate pushed down the prices of non-REO homes by over 26 percent since their highest price levels in 2005. But if REO sales are included in the computation, the drop in home prices was nearly 47 percent.

On the other hand, Massachusetts, which is one of the states which have avoided record foreclosure sales, REO sales did not push down home prices as sharply as in Michigan.

In the first 6 months of this year, only 14 percent of total home sales in Massachusetts were REO sales. This lower percentage pushed down the prices of non-REO homes by only 15 percent. If REO home sales were included in the computation, the home price decline was 19 percent, which is still close to 15 percent.

Another important finding in the LPS report is the increase in the percentage of REO foreclosure home sales despite the decrease in total home sales in the first 6 months of the year in several states.