A key to housing recovery? Out-of-court foreclosures

Dorota Dyman & Associates Real Estate

WASHINGTON — Why have many of the local housing markets that were hit hardest during the bust — especially in California — bounced back so vigorously and quickly, with prices close to or exceeding where they were in 2005 and 2006?

And why have many others along the East Coast and in the Midwest had a slower move toward recovery, with sluggish sales and gradual increases in values?

Though multiple economic factors are at work, appraisal-industry experts believe they have isolated a crucial and perhaps surprising answer: Real-estate markets rebound much faster in areas where state law permits foreclosures to proceed quickly, moving homes with defaulted loans into new owners’ hands expeditiously, rather than allowing them to sit and deteriorate, tied up in court procedures for years.

Prices of foreclosed homes in such areas typically are depressed and negatively affect values of neighboring properties, but they don’t remain so for lengthy periods because investors and other buyers swoop in and return them to residential use rapidly.

By contrast, in states where laws allow large numbers of homes in the process of foreclosure to remain in legal limbo, often empty and unsold, home-price recoveries are hindered because lenders are prevented from recovering and reselling the units to buyers who’ll fix them up and add value.

Pro Teck Valuation Services, a national appraisal firm based in Waltham, Mass., recently completed research in 30 major metropolitan areas that dramatically illustrates the point.

All the fastest-rebounding markets in October — those with strong sales, price increases and low inventories of unsold houses — were located in so-called nonjudicial states, where foreclosures can proceed without the intervention of courts.

All the worst-performing markets — where prices and sales have been less robust and there are excessive numbers of houses available but unsold — were located in judicial states, where post-default proceedings can stall foreclosure completions for two to three years or even more in some cases.

Among the best-performing areas were California markets such as Los Angeles and San Diego. California is a nonjudicial state. So is Washington state.

Among the worst performers were Florida markets such as Tampa and Fort Myers, as well as parts of Illinois and Wisconsin. All of these are judicial states. Continue reading

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