Housing markets recover faster in nonjudicial foreclosure states, report says

How quickly a local market recovers in terms of home prices and real estate activity may be contingent on whether it's located in a judicial or nonjudicial foreclosure state, Capital Economics said .

Judicial foreclosure states require financial firms to handle default proceedings within an official court of law, while nonjudicial foreclosure states offer a set of rules and processes that are streamlined and designed to occur outside of court.

Paul Diggle, property economist for Capital Economics, cited data Friday from the Federal Housing Finance Agency index, showing home price growth in the fourth quarter of 2011 declining 0.3% from the previous quarter within judicial foreclosure states and 2.3% from year-ago levels. On the other hand, home prices grew 0.3% in nonjudicial foreclosure states quarter-over-quarter while falling a slight 1.6% over the previous year.

The crux of the report is that nonjudicial foreclosure markets are performing better in terms of price stabilization.

"We think that differences in foreclosure procedures will continue to affect state-level house price trends, with nonjudicial states outperforming," said Diggle. "After all, as foreclosure pipelines are brought down to healthier levels in nonjudicial, high burn-through states, supply conditions can more rapidly tighten to the point that they support price growth."

He believes low burn-through rates in judicial foreclosure states keep houses on the market for longer periods of time, pushing prices downward.

While the Capital Economics report suggests nonjudicial foreclosure states help local economies re-stabilize the markets in an efficient manner, Tom Feltner, vice president of the Woodstock Institute, says there are many elements that impact local home prices aside from the type of foreclosure state the property resides in. Those factors include demand, credit availability and local confidence in the market.

Feltner declined to classify one method of foreclosure as more effective or market-supporting than the other.

"I think that from our perspective, there are obviously a lot of challenges with moving properties through the judicial process," Feltner said. "It takes more time, but I think as part of that process, there are more inbuilt foreclosure intervention points for homeowners who are working through the process of trying to save their home," he said.

"I think in terms of whether or not it's better to move properties through faster or not, it's most important to ensure the borrower has every single opportunity to save their home."  

Feltner said with the robo-signing settlement in the past, it's likely judicial and nonjudicial foreclosure states will see foreclosure timelines speed up.

Diggle with Capital Economics expects a similar trend and worries about the impact of a slew of foreclosures hitting judicial foreclosure states all at once. "[T]he risk that the robo-signing settlement prompts the rapid transfer of homes in foreclosure into the visible supply is surely a much greater threat to the house price outlook in judicial states, where the foreclosure backlog is that much larger," he said.

kpanchuk@housingwire.com