Are foreclosure laws to blame for patchy US price gains?

TRD New York /
Dec.December 06, 2013 02:40 PM

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 non-judicial 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 non-judicial 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.

Currently 22 states are classified as judicial foreclosure jurisdictions, including Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Vermont and Wisconsin. All other states handle foreclosures without court participation.

Tom O’Grady, CEO of Pro Teck, says the differing rebound patterns of judicial and non-judicial foreclosure states jumped out of the study data dramatically. “When we looked closer” at rebound performances state by state, “we observed that non-judicial states bottomed out sooner” — typically between 2009 and 2011 — “versus 2011 to 2012 for judicial states, and have seen greater appreciation since the bottom,” typically 50 percent to 80 percent compared with just 10 percent to 45 percent for judicial states, O’Grady said in comments for this column.

“Our hypothesis,” he added, “is that non-judicial states have been able to work through the foreclosure [glut] faster, allowing them to get back into a non-distressed housing market sooner, and are therefore seeing greater appreciation.”

California, for example, experienced severe price declines immediately after the bust hit in 2007 and 2008 — thousands of foreclosed homes flooded the market, depressing values of other real estate in the area. O’Grady calls this a “concentrated foreclosure effect” that is painful while it’s happening but relatively quickly purges the marketplace by turning over distressed units to new ownership.

Judicial states, on the other hand, tend to be still struggling with homes flowing out of the foreclosure pipeline — prolonging the negative price effects on other houses for sale.

O’Grady noted that in non-judicial states such as California, foreclosures now account for just 10 percent of all sales, and home listings amount to a four-month supply — well below the national average. In slow-moving judicial states, by contrast, anywhere from 25 percent to 50 percent of all sales are foreclosures, and unsold inventory represents anywhere from a five-month to 10-month supply.

The takeaway here? Though real estate prices are popularly thought of as reflecting the “location, location, location” mantra, inherent in that concept is something less well-known: State laws governing foreclosure affect market values as well and govern how well they bounce back after a shock. Prices take much longer to recover when foreclosures drag out for years.

Kenneth Harney is a syndicated real estate columnist.


Related Articles

arrow_forward_ios
The threat of eviction hangs heavily above immigrant families who have lost work as a result of the coronavirus pandemic. (Getty)

Eviction bans don’t always protect the most vulnerable

Eviction bans don’t always protect the most vulnerable
Governor Andrew Cuomo and New York Chief Administrative Judge Lawrence Marks (Getty)

New York courts put the kibosh on foreclosures

New York courts put the kibosh on foreclosures
Toby Moskovits, Fortress managing director Spencer Garfield and the 215 Moore Street Site (Moskovits by Sasha Maslov)

Toby Moskovits’ Bushwick Generator thrown into receivership

Toby Moskovits’ Bushwick Generator thrown into receivership
The number of mortgages in forbearance continues to climb though servicers say they are fielding fewer calls for help from property owners.

TRD Insights: Mortgage forbearances keep climbing

TRD Insights: Mortgage forbearances keep climbing
Clockwise from top left: Poughkeepsie Galleria, Crossgates Mall, Destiny USA and Walden Galleria (Credit: Google Maps; I Love NY; Visit Buffalo)

After Palisades Center, 4 more Pyramid Group malls head to special servicing

After Palisades Center, 4 more Pyramid Group malls head to special servicing
SoFla prepares for flood of foreclosures and evictions after governor’s freeze

SoFla prepares for flood of foreclosures and evictions after governor’s freeze

SoFla prepares for flood of foreclosures and evictions after governor’s freeze
Governor Andrew Cuomo (Credit: Getty Images, iStock, and Pixabay)

Cuomo’s executive order tells banks to give homeowners a break

Cuomo’s executive order tells banks to give homeowners a break
Caught up in a dozen recent lawsuits, Brooklyn developer Toby Moskovits blames her firm’s debt troubles on “collusion” and a “personal vendetta” (Illustration by The Real Deal; Moskovits by Sasha Maslov)

Creditors are banging on Toby Moskovits’ door

Creditors are banging on Toby Moskovits’ door
arrow_forward_ios

The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

Loading...