Housing markets rebound faster when foreclosures proceed quickly

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 that 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 will fix them up and add value.

Pro Teck Valuation Services, a national appraisal firm 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. 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, chief executive of Pro Teck, says the differing rebound patterns of judicial and nonjudicial foreclosure states jumped out of the study data dramatically.

"When we looked closer" at rebound performances state by state, "we observed that nonjudicial 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% to 80% compared with just 10% to 45% for judicial states, O'Grady said.

"Our hypothesis," he added, "is that nonjudicial 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 nonjudicial states such as California, foreclosures now account for just 10% of all sales, and home listings amount to a four-month supply — well below the national average. In slow-moving judicial states, by contrast, 25% to 50% of sales are foreclosures, and unsold inventory represents a five-month to 10-month supply.

The take-away 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 and govern how well they bounce back after a shock. Prices take much longer to recover when foreclosures drag out for years.

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Flipping houses in the Temecula/Murrieta Valley and across the Inland Empire has been a lucrative venture for investors for many years. Many think it is a quick way to a fast buck. Many have tried and many have failed. Flipping houses is serious business and should not be taken lightly by the novice real estate investor. Before you begin down this path, prepare yourself. Here are five quick tips to help you understand what you’re in for, before you actually start investing your money.

1. You need to know that it’s work.

You need to work with a good local REALTOR® who understands the local market. A local REALTOR® can not only help locate profitable homes through the Multiple Listing Service (MLS) but will be able to lead you to other lesser known resources as well. When it’s time to sell the home your REALTOR® will know the market and help you achieve the greatest price for your fix and flip home for sale.

2. If you are buying low, you’ll need to spend more.

The whole concept of discounted homes for sale is that they need repairs and upgrades. There is no reason for someone to sell a turnkey, state-of-the-art home for a discounted price. It takes time and money to get a home ready to flip and generate the largest possible profit.

Contractors are an important part of your team, so start lining them up now. Yes, you should be able to do some work yourself, but understand that time is money – how much time do you have to invest in the project? The quicker it sells, the quicker you get paid and the money you have tied up is free again.

3. The kitchen makes the sale.

The one room that swings more sales is the kitchen. Here in the Temecula/Murrieta Valley, kitchens should have recessed lighting, solid surface countertops and high-end matching appliances if you want to capture the ‘wow’ factor. Upgraded cabinets, a full backsplash, under-the-counter lights and tile/hardwood floors all do their part in closing a deal.

4. Garage doors are part of curb appeal.

There’s nothing worse than selling an upgraded home, beautifully landscaped with a nasty old wooden garage door (just as bad is a dented, metal roll-up). People do judge books by their covers and houses by their curb appeal. The garage door is the first thing anyone sees, so make sure it’s memorable. First impressions count.

5. In landscaping, less is more.

When a potential buyer is considering purchasing a new Temecula/Murrieta home, they want it to look nice. What they don’t want is a lot of high-maintenance landscape, no matter how stunning. Remember your audience, most home buyers in our Valley are working families who don’t have all week to tend to the grounds nor do they want to spend all weekend doing it either. Keep your landscape clean and simple and don’t forget the back and side yards, too.

If you are considering getting into the real estate investment business, either as a part-time venture or your life’s work, know what you are getting yourself into. Follow these simple suggestions and you’ll be making your first trip to the bank from escrow in no time.

Call us today and get the information you need to make the right decision. The info is free, call now! (951) 296-8887.

Questions regarding available inventory and/or other real estate matters please contact me, Mike@GoTakeAction.com. Mike Mason, Broker/Owner of MASON Real Estate Cal. BRE: 01483044, Board of Director of your Southwest Riverside County Association of Realtors® (SRCAR), Traveling State Director, California Association of Realtors® (C.A.R.).