There's no question that distressed property sales wreak havoc with neighborhood price stability. But exactly how badly do short sales and foreclosures affect prices?

According to a study issued July 23 by Housing Intelligence, an independent research and analytical firm, distressed sales undercut the normal housing market by more than a third.

For the last 18 months, the company found, sales of real estate owned have commanded a closing-table price of $91 per square foot. At the same time, new homes closed at $134 per foot and regular resale houses settled at $141 — or a combined average of $140. (Nearly four times as many existing houses change hands as new units.)

The difference is nearly $50 per square foot, or 35%, which means that both builders and resellers have to cut their prices by 35% to compete.

Of course, most "regular" houses show better and are in better condition than even the best REO. But at a 35% price differential, even the nicest, most decked-out places have a tough time competing for the hearts and minds of buyers with dollar signs in their heads as they scout the neighborhood looking for bargains.

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