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Foreclosure Challenges Migrating to Northeastern States

The most recent monthly Foreclosure Market Report from RealtyTrac was released last week. It confirmed what we have been stating for the last several months – foreclosures are increasing in states with a judicial process (especially in the Northeast) while at the same time are decreasing in non-judicial states. As stated in the report:

“Foreclosure activity in the 24 non-judicial states (such as Arizona, California, Nevada and Georgia) and District of Columbia combined decreased 31 percent annually. Twenty states registered year-over-year increases in foreclosure activity, led by judicial foreclosure states such as New Jersey, New York, Maryland, Illinois and Pennsylvania.”

It seems that the judicial process in many states just delayed the inevitable. People falling behind on their mortgage payments did not eventually catch up during the extensive delays. These states will now be faced with many of the same challenges the non-judicial states (those that DID NOT delay the foreclosure process) have faced over the last few years.

Daren Blomquist, vice president of RealtyTrac, reported:

“Bucking the national trend, deferred foreclosure activity boiled over in several states in August.”

An increase in foreclosures leads to several challenges in a real estate market:

  • Foreclosures create downward pressure on all homes in the region
  • Falling prices increase the percentage of homes in negative equity
  • Troubled sellers in a negative equity must short sale their home in order to sell

Some of these states, such as Florida and Illinois, have learned how to deal with these challenges over the last two years. Other states, such as New York, New Jersey and Pennsylvania, must now learn how to navigate their way through this minefield of challenges. Bloomberg quoted Mark Zandi, chief economist at Moody’s Analytics Inc, on this issue in a recent article:

“Shadow inventory is falling in much of the country –except for the Northeast. The implication is that house prices will be much weaker in the Northeast in coming years as these distressed properties eventually get sold.”

The good news for states facing the foreclosure issue for the first time is that the overall housing market is much stronger. The increase in demand we are experiencing will eat into the supply of distressed properties about to come to market. The impact on these markets will be nowhere as severe as it was in some of the regions challenged earlier.

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