A Tale of Two Housing Recoveries

Believe it or not: The housing market is recovering in most states. Home price indexes for 38 states ended 2011 above their early-year lows. And while prices aren’t yet up to prerecession levels, 30 states had more than two quarters of growth under their belts by the end of 2011, according to data from the Federal Housing Finance Agency.

But the national index is still falling, dragged down by pricing drops in the worst-hit states. It’ll drop another 2% in the next six months before starting to climb in the second half of the year. There are just a handful of states dragging down the national average…Arizona, California, Florida, Michigan and Nevada…all of which saw home prices drop by more than 50% from 2006 levels. These five states are home to 46% of the inventory working through the foreclosure process.

Furthermore, “almost half of the shadow inventory [homes which could come on the market in the near future because owners are in default on their loans] is not yet in the foreclosure process,” says Mark Fleming, chief economist at data analysis firm CoreLogic. “Also, shadow inventory remains concentrated in states impacted by sharp price declines and states with long foreclosure timelines,” he says.

The pace of a state’s housing recovery depends largely on how it handles foreclosures. Twenty-four states require a judicial review, calling for a judge to sign off before a house can be transferred to the lender. The foreclosure backlog clogging the pipeline in states with judicial review is 2.6 times larger than in states without judicial review, says Florida mortgage analysis firm Lender Processing Services.

And states without judicial review are selling off foreclosed homes faster -- up to three times faster in January than those with judicial review. “In January, you could have had some seasonal impact,” says Herb Blecher, vice president of LPS Applied Analytics. “But if it continues, it really is a resolution of this pipeline issue we’ve seen for some time.” In late 2010, several large banks, including Bank of America, J.P. Morgan, Wells Fargo and Citigroup, halted foreclosures in some states because of improper documentation. Afterwards, states without judicial review saw the resolution of foreclosures pick up relatively quickly, while foreclosures in “states with judicial reviews have been largely flat for well over a year,” Blecher says.

In many cases, home prices are already ticking up in states where foreclosures work through the process faster. Texas, for example, has the shortest foreclosure timeline, 90 days, and it saw home prices climb 1.2% in the fourth quarter of 2011, according to the FHFA. In Delaware, the time between missing a mortgage payment and foreclosure averages 106 days, and prices grew 0.6% in the fourth quarter. In New York, however, where judicial reviews and mortgage mediation requirements stretch the foreclosure time to a whopping 1,019 days, prices fell 1%.

Even where there is a huge overhang of housing inventory, there is a big difference. Take Florida and Arizona, two states bearing the brunt of the housing bubble burst. It takes an average of 806 days to complete foreclosure in the Sunshine State, which requires judicial review. In the Grand Canyon State, which doesn’t, it takes less than 200 days. As a result, Arizona’s market is already turning the corner. Phoenix home prices, for example, gained 2.7% in the fourth quarter of 2011, after plunging a staggering 55% from the 2006 peak. In Florida, prices are still falling.

That’s not to say some delays aren’t justified. The robo-signing fiasco and other cases validate the need to be diligent in the foreclosure process. Mediation is justified if there is an actual chance the homeowner can afford to make future payments on a house. But if not, the faster inevitable foreclosures can be concluded, the faster prices can rebound, because foreclosed-upon homes are often listed at a 40%-50% discount to comparable houses and vacant, blighted homes depress the prices of those nearby.

Florida is trying to cut damaging foreclosure delays with legislation to let lien holders request an expedited process. But it appears the move will be put off until next year. Although a bill passed in the state House of Representatives this year, it did not clear the state Senate. Odds are it will come up again in the next legislative session. Other states, though, are headed in the opposite direction, imposing new requirements for mediation between homeowners and lenders, which will add more months of delay. New York’s required mediation, for example, adds about one year to the process, according to one estimate.

Nationally, there is some movement to help clear excess inventory. Lenders’ recent agreement with state attorneys general will provide relief for about 500,000 homeowners, keeping many of them from going into foreclosure. And a pilot program at Fannie Mae to sell off foreclosed-upon homes in bulk, with the requirement that they be rented out for five years, is getting a warm reception from the market. Fannie Mae is selling 2,500 homes in the hardest-hit areas, such as Atlanta, South Florida, Phoenix and Las Vegas. Look for the government-sponsored entity to expand the program later this year and for other mortgage holders, including Freddie Mac, to follow suit.