Housing recovery can happen at very different paces in states that use judicial foreclosure laws compared with those where the foreclosure process happens non-judicially.

Less than half (22) of the states have judicial foreclosure laws, yet more core-based statistical areas (CSBAs) from these states among near the top 10 and top 25 lists for most foreclosures than CSBAs in non-judicial states, according to the Pro Teck Valuation Services Home Value Forecast (HVF) for February 2016 released Wednesday. Seven of the 10 CBSAs with the highest percentage of foreclosures, as well as 19 of the top 25, came from judicial states, according to Pro Teck.

The difference in foreclosure laws has resulted in such a disparity in recovery in two housing markets, Phoenix and Cleveland, according to the HVF. Cleveland, which is located in the judicial foreclosure state of Ohio, ranked 21^st of the list of CBSAs with the highest foreclosure rate; Phoenix, located in the non-judicial foreclosure state of Arizona, ranked number 174.

“In our May 2014 Update we highlighted the differences in the recoveries the two cities were experiencing, and how foreclosure laws in Cleveland (judicial foreclosure) versus Phoenix (quicker, non-judicial foreclosure) were impacting the market,” said Tom O’Grady, CEO of Pro Teck Valuation Services. “Today, the lag in recovery can still be seen in states with judicial foreclosure laws, where the foreclosure process can take up to two years.”

Cleveland was ranked as one of Pro Teck’s “Bottom 10” housing markets in May 2014 due to its high share of “market” sales that were foreclosure sales (32.47 percent, nearly one in three). By comparison, in a healthy housing market, foreclosure sales would account for about 5 percent (one in 20) of all market sales.

While foreclosure sales as a percent of market sales remain elevated in Cleveland (17.45 percent), that share is nearly half of its total from May 2014. Also in Cleveland, the months of remaining inventory (MRI) has declined from 8.39 to 6.26 during that same period.

“Cleveland’s judicial foreclosure process has drawn out its recovery versus Phoenix, and prices have not rebounded to anywhere near pre-crash levels,” said O’Grady. “With a large number of 2006 HELOCs coming due, many could find themselves in a difficult situation when their loan is called.”

In Phoenix, housing prices rebounded strongly in 2012 after overshooting on the downside. Phoenix was quickly working through its foreclosure inventory during this time, and in May 2014, Pro Teck noted that Phoenix was on a path to returning to market fundamentals and that foreclosures were returning to historic norms.

Phoenix has now “recovered completely,” according to Pro Teck, with 5 percent of all market sales as foreclosure sales and an MRI of 4.51.

“This strength can be seen in pricing trends, where once the average home had lost more than 50 percent of its value are now back to 85 percent of pre-crash highs,” O’Grady said. “We believe that Phoenix will make up the majority of the 15 percent gap within the next two years.”

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