Homes in foreclosure do factor in when pricing a home for sale. Rob's correct, of course, that condition does count, and some houses in foreclosure are in poor condition. And the comment about the absoption rate is good.
Consider, though: Take a neighborhood with 4 similar houses for sale. One is in foreclosure. They're priced at $400,000, $410,000, $412,500, $417,000....and $330,000 (the one in foreclosure). Which one do you think is going to get the most traffic? And I can hear buyers saying, "Well, yes, the one at $400,000 is nicer. But not $70,000 nicer. Now, if that $400,000 house could come down to $360,000, I'd probably go with the nicer house. Mr./Ms. Realtor: Do you think they'll consider an offer at $360,000?"
When you're looking at absoprtion rate, you really are hoping (in this case) that the absorption outruns the foreclosures. I know of certain neighborhoods in which the only houses for sale--and there are a lot of them--are foreclosures. One condo complex where 3 bedrooms/2 baths had sold for up to $300,000 are now selling for $200,000 or less today. The people not in financial trouble can't afford to put their condos on the market; why bother listing one at $260,000 when there are dozens below $200,000?
Hope that helps.