State’s handling of foreclosures could speed recovery

The difference in how states handle foreclosures may determine how quickly their housing markets make a full recovery, according to a new report by Capital Economics.

States with nonjudicial foreclosure markets – such as Washington where foreclosures can be approved outside the court system – are seeing housing prices stabilize faster than states that require foreclosures to go through the court system, according to Capital Economics.

The report notes that judicial foreclosure states tend to see houses linger on the market longer, which ultimately can cause prices to drop.

“We think that differences in foreclosure procedures will continue to affect state-level house price trends, with nonjudicial states outperforming,” Paul Diggle, property economist with Capital Economics.”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.”

The Federal Housing Finance Agency index recently showed that housing prices were down 2.3 percent year-over-year in the fourth quarter of 2011 and dropped 0.3 percent in the fourth quarter compared to the previous quarter in states with judicial procedures for foreclosures. In states with nonjudicial foreclosure procedures, however, home prices increased 0.3 percent quarter-over-quarter and dropped only 1.6 percent year-over-year.

Economists have predicted a surge in foreclosures is coming in the next few months from the $25 billion robo-signing mortgage settlement. The foreclosure wave will pose a “much greater threat to the house price outlook in judicial states, where the foreclosure backlog is that much larger,” Diggle told HousingWire.