Tag Archives: Foreclosure

DrHousing: The Good, the Bad, and the Ugly aspects of the American housing market

The Good, the Bad, and the Ugly aspects of the American housing market: Key indicators of the 2013 real estate market.

The US housing market is massive.  You would expect this from a nation of 315,000,000+ people spanning over 50 states.  So it is important to understand the various dynamics occurring over many states.  In regards to single family home buyers, in most of the United States home prices are very reasonable.  This is hard for some in the coastal regions to digest or even comprehend.  When you look at certain markets in high priced areas, many people have a hard time penciling out the financial details.  Yet with such a large number of investors purchasing with cash, a new market has been created.  But if we are to take the US market and make a wide-eyed observation, we will find some good, bad, and ugly aspects of the current housing market.  Whereas in 2008 through 2010, the market was dominated by the bad, ugly, and grotesque.  What can we say about the current US housing market?

The Good

One good aspect of the market is overall, affordability is back in line to historical trends:

housing affordable

Price-to-rent ratios are back in line in many parts of the country.  In fact, this is the big push from the all cash buyers in places like Arizona, Nevada, and Florida.  The one thing I would be cautious about is in places like Arizona, you have over 50 percent of buyers coming from the investment bunch and when you look at rental prices, they are weak and vacancies are very common.  But with such a high number of investors buying, you basically have investors selling to other investors thinking they will produce higher yields.  However, for non-investors in most US markets prices are now affordable thanks to the big drop in prices but also the Fed’s tantalizingly low interest rates.  Sure, the Fed’s balance sheet is well over $3 trillion but that is an issue for another day.

If you follow the mainstream press and use this as a barometer of what most Americans see as their primary source of information, then the Federal Reserve might as well be nuclear physics because it is never discussed or even explained.  So most people are driven by the monthly nut psychology.  Low rates have boosted affordability dramatically.  Americans are horrible savers.  Something like 50 percent of Americans do not have a retirement account.

I was having a conversation with someone and their mentality is similar to many coastal folks.  “Good luck finding a property in the US for less than $300,000 in a safe area!”  Of course, it is hard for some to understand that in many states, homes can be had for $100,000 in good areas and a $200,000 home will buy you a very nice spot.  Heck, even in the Inland Empire in California you can find a great place for $300,000.  Of course this person is obsessed with buying in prime Pasadena so good luck on that one when you have limited inventory and many other clones with similar thinking.

The Bad

While not as good as it should be, household formation is now picking back up:

household formation

Funny how in 2005 when all you needed was a pulse for credit, household formation was up to a blistering 1.8 million per year.  The crash brought on the “move in with mom, dad, or friends” trend and you can see this in 2008 where household formation was at a stunningly low 400,000.  This is also another reason why the housing market is now picking up nationwide.  From 2011 to 2012 household formation went from around 600,000 to a healthier 1,000,000.  That is a big jump.

The one element I see getting in the way of this is the massive student debt in the market now above $1 trillion.  Many younger Americans are still financially strapped so it is hard to see this improving anytime soon.  Although we are nowhere close to the boom days, household formation does seem to be on an upward trend and this is a positive for housing in general.

The Ugly

The housing market is still a mess when it comes to distressed properties:

bad loans

Over 5,000,000+ Americans are in one of the following:

1,927,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.

1,483,000 properties that are 90 or more days delinquent, but not in foreclosure.

1,694,000 loans in foreclosure process.

The market is full of bad loans but the number is going down.  Many investors buying in bulk have connections that allow them to purchase many of these properties at auction before they even hit the MLS for the regular Joe and Jane.  So the low inventory is simply a manifestation of banks leaking out properties at their own pace and to select individuals.

In most parts of the US, the housing market is fairly normal based on price and financing options.  However, in places like California good luck buying a home when many in the industry think prices will keep going up and bidding wars are now fairly common.  Get your PowerPoint presentation ready and your heart wrenching story (and wallet out) to make a bid in many prime markets.  California is a boom and bust market and we’re currently in the boom phase.  It is interesting how many e-mails I get where the person is actually sad and emotionally troubled that they got out bid on an $800,000 or even $1,000,000 home.  Obviously you can only get so much from an e-mail but some people seem miserable because they can’t spend $1 million on a home!  I got an e-mail like this from someone in San Francisco.  You know what my recommendation was?  Go ahead and buy because you seem absolutely miserable!

For most Americans, the decision to buy is fairly simple in today’s market.  In other markets, there are definite manic like behaviors.  We’re seeing some mania in California.  Buying a home is a big decision yet some are willing to drop $700,000 (i.e., finance 80+ percent of the purchase) and treat this as if they were buying a car. Buying a home is a 30 year commitment for most.  Many sell within 7 to 10 years but that is assuming prices keep going up.  Some that bought in 2005 are still underwater today (8 years later).  You want to know what was going on 30 years ago?  Ronald Reagan was President, we were in the Cold War, The Red Hot Chili Peppers launched their first self-titled album, and a fixed rate mortgage was 13.4 percent.

There are good, bad, and ugly things in today’s housing market.  The scope of each of these really depends on where you live in the US.


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Read of the Day: Modified mortgages re-enter shadow inventory

Modified mortgages re-enter shadow inventory – By next month the housing crisis will have cost 5,000,000 Americans their homes via foreclosures. Distressed inventory still above 5,000,000.

If we were to take a count of how many people lost their homes to foreclosure since 2006, that figure will reach 5,000,000 by the end of the year.  This is an enormous number and is rarely discussed as a historical case study in action.  It is interesting how many seem to ignore this grim figure and pretend that it never happened.  So keep in mind the turmoil those 5,000,000 completed foreclosures have had on the overall housing market.  Will the current shadow inventory impact the current upward trend in housing?  Banks are selling into some fierce momentum but things are still tepid with the overall economy.  Most importantly, household income growth is nowhere to be found.  Completed bank repossessions are still running at about 50,000 per month and foreclosure starts are still close to 100,000.  This housing bounce as we have mentioned is coming from a trifecta of low interest rates, Wall Street investors, and foreign money.  I think it is useful to take a look at where we were and where things are heading.

The impact of the housing crisis

RealtyTrac put together an excellent chart highlighting the damage caused by this housing bubble bursting:

foreclosure starts and complete reos

Source:  RealtyTrac

If you want to take 2006 as a baseline, it appears that repossessions run at around 20,000 per month and foreclosure starts are around 50,000 in better times.  Since 2006 the housing crisis has cost nearly 5,000,000 Americans their homes while another 10,000,000 have faced the prospect of foreclosure.  This is an incredibly high figure considering that nationwide, roughly 50 million households carry a mortgage on their property. This context is important when we examine the following current data:

shadow inventory

You still have over 5,300,000 mortgages in the foreclosure pipeline.  Rising home values make it easier for banks to unload these properties via short sales and other mechanisms.  Given that the entire market was turned upside down because of 5 million completed foreclosure, the 5,300,000 homes in the foreclosure pipeline is still a big concern and the fact that nearly 100,000 are being put back into this bucket each month is concerning.  The current momentum is clearing out properties but as we had mentioned, prices in areas like Arizona are actually turning investors away.

Modifying out of the shadows

There was an interesting angle taken over at SoberLook regarding the shadow inventory figures:

Mod redefaults

“This could be a cause for concern. However, banks have some leeway in when they actually take charge-offs during the year, so it is worth taking a look at a more up to date delinquency data. JPMorgan recently published the October delinquency results. Indeed there was an increase in delinquencies, mostly in October (there seems to be some delay in reporting delinquencies that the Fed picked up in Q3, particularly by Bank of America). But delinquencies seem to the heaviest in sub-prime mortgages. Is this another wave of subprime defaults?”

A modified mortgage is yanked out of the shadow inventory pipeline.  From data from the OCC and other figures from HAMP, re-defaults on modified loans are very high.  It might take one or two years to re-default but the success rate is poor.  In other words, was the shadow inventory figure temporarily depressed because of these weak modifications?

From looking at the figures, this does seem to be the case.  What is interesting however, is the massive jump in short sales being approved by banks.  The shell game allowed these homeowners to tread water until the Fed went into QE3 and now, banks are “working” with these homeowners to unload the properties at higher prices to new buyers and in many cases, investors.  I’m not sure if this is really the core function of helping homeowners out.

Something is definitely going on recently because charge-off rates have spiked recently and the housing market is moving up:

Charge-off rate

Source:  FRB

So how many mortgages have been modified?  Since 2008 it looks like over 2.5 million:

mortgages modified

In other words, you have a solid number of modified homes re-entering the shadow inventory figures.  With investor demand and short sales, the figure is moving lower.  But it is important to always keep things in perspective especially when moving buckets around.

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7 Housing Trends to Look for Going into 2013. Did the foreclosure pipeline increase last month?

7 Housing Trends to Look for Going into 2013. Did the foreclosure pipeline increase last month?

There was an interesting trend that emerged last month.  2012 has seen a reversal in the housing market yet this topic has been largely absent from all debates.  The piece of data that was released addressed the still formidable foreclosure pipeline.  Foreclosure starts saw a 260,000 increase from the previous month.  It is expected that actual foreclosures are decreasing as the pipeline is being sold and as the economy recovers, this figure will slowly move down.  Yet to see the foreclosure starts pipeline increase goes counter to everything we are hearing.  What gives?  There are a few reasons for this increase.  We also need to explore the building side of the equation and how rents have been picking up in 2012.  The flood of investors and Wall Street swarming into the rental market is a new experience.  What are the trends for housing going into 2013?

Trend #1 – Foreclosure pipeline

foreclosure pipeline data

It was surprising for some to see the earliest distressed pipeline bucket increase by 260,000 last month.  The reason this was surprising is that there has been a steady decline in foreclosure starts for over a year.  What this means is that we will be seeing more of these foreclosure hit the market in the next few months.  Why the sudden jump?  Banks are being calculating and want to sell into a positive trend for the housing market.  They see big investors over bidding and buying properties, many times without viewing the place in lots, and pushing prices higher.  Yet at some point markets do get saturated.

Economics would tell you that more rental supply on the market will likely push rents lower.  Yet many are now buying to flip thus removing property for sale (until ready for the flip) or rent.  This is one reason why rents and prices have been pushed up this year as well including the ultra-low mortgage rate.  Yet this trend is not being driven by solid economic fundamentals.  Certainly not to the level we are seeing with price increases.  The trend to look for into 2013 is how much momentum this can carry going forward.

Trend #2 – Rental Market

Rental prices have seen a nice move up in 2012:

cpi rent

Too bad incomes have remained stagnant.  That is the unfortunate reality with this push up in rentals.  More household income is now being spent on rental housing.  This usually impacts those least able to afford these price increases.  The rental vacancy rate has also been falling:

rental vacancy rate

Big pocket investors are diving into the market trying to chase yields.  Yet being a landlord is an expensive business and probably will not scale well with single-family homes.  The projections many of these investors have are too rosy and this usually is not seen until a few years of property ownership.  We have to see if this trend continues going into the new year.

Trend #3 – New home sales?

New home sales are a better indicator of a real rebound in housing since this trend is likely to put people back to work in new home construction and shows demand exceeding current supply.  This trend is barely visible:

new one family houses sold

There is a modest pickup in new home sales but it hardly registers on the chart above.  The real demand from Wall Street and many funds is for cheaper properties.  So far, we have yet to see this trend impact the new home sales market.  We are well below the annual trends going back to 1960.  All the activity at the moment is at the lower end plus a major part of the market (above 30 percent) is being dominated by investors.

Housing starts are picking up but the trend is small:

housing starts

This is another trend to keep our eyes on going into 2013.

Trend #4 – Expensive state housing

Some areas in California have seen no correction since the bubble burst.  In fact, many homes are selling for prices above the previous peak price.  Construction employment in California is still stuck in the 1990s:

construction employment

And given the sales volume and the reality that all loans are government back, you can forget about the hundreds of thousands of jobs that were dependent on housing bubble 1.0.  If housing is in such a good trend, why are we not seeing construction jobs pickup?  The reason again is investor demand is for existing lower priced homes while flippers are targeting high priced markets for used homes.  Construction employment would also see a boom if people were remodeling their homes but short-term investors are looking more for an in and out strategy.

Take a look at some recent Culver City home sales:

culver city

$700,000 for a 1,100 square foot home?  $848,000 for a 3 bedroom and 2 baths home?  You be the judge and ask whether these are realistic prices.  These prices are completely dependent on low interest rates.

Trend #5 – Prices going up

The Case Shiller Index turned positive in 2012.  Will this trend continue into 2013?  The large boost came about because of low interest rates.  Ben Bernanke has already hinted that he will be leaving in 2014.  We are already seeing the impact of low rates on the standard of living for many.  As more and more seniors become dependent on fixed incomes (the majority rely on Social Security as their primary source of retirement income) how are they going to feel about their income being stuck while food and energy prices soar?

There is always a cost to taking actions like this.  This was not organic growth.  The Fed with QE3 is buying $40 billion in MBS each month and already has a balance sheet of over $2.8 trillion.  This engineered growth will need to continue to keep the trend in housing going.  The market is already addicted to sub-4% mortgage rates.  The market is all government backed loans or big pocket investors.

The trend for prices moving up will depend largely on mortgage rates but also on how investors treat the rental market.  Will many try to sell into the current market?  We are already seeing this with flipping rates increasing.

Trend #6 – Demand for loans

Demand for loans is high:


This push was driven by lower and lower rates.  It is hard to envision rates moving any lower from here.  Rates are already in a negative scenario courtesy of the Federal Reserve.  At this point, we are simply conditioning the market to these low rates and the Fed will need to purchase $40 billion a month in MBS to maintain this path.  The Fed has never gone this deep into their balance sheet expansion so those saying they know how this will play out have no historical reference point.  The only other country that has gone this deep into quantitative easing is Japan and their economy isn’t so hot.  They also entered these agreements to save their zombie banking sector.

Trend #7 – Remember history

There are some interesting stories in the news that are worth examining:

“ From Cincinnati.com. “The costs of the housing crisis remain steep in Greater Cincinnati and across the nation, yet the presidential candidates barely touch on the topic. ‘I find it absolutely remarkable,’ said Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio. ‘If you look at what triggered this whole financial market seize-up, it was housing.’”

This was an interesting trend.  The entire election largely stayed away from housing even though it was at the core of our current financial crisis.  Why?  It is a losing proposition to discuss even while prices are going up.  The big winners are large money investors and flippers.  For the typical home owner, as we know many are still underwater so bringing this up in the debate might bring to surface some unwanted feelings.  Plus, who is going to address the mortgage interest deduction for wealthy households?

“Since 2006, Greater Cincinnati homeowners have joined families nationwide who’ve lost $7 trillion in home equity. One in four local families – 111,397 in all – are ‘under water’ on their mortgages. That cripples their ability to refinance at today’s historically low rates or sell their homes, leaving them vulnerable to foreclosure if their finances take a downturn.”

This speaks to my previous point.  Talking about housing brings back memories of the financial crisis.  Many across the nation, especially in crucial swing states like Ohio or Florida are deep underwater.

“Roger Davis of Fairfield, a retired police officer, is one of millions of Americans looking for answers. He has pinched pennies to keep up payments on the house he and his wife bought five years ago. Their home has lost so much value in the years since that the family is now underwater. Davis is disgusted that his bank hasn’t met him halfway by allowing him to refinance. ‘People are walking away from their homes – we’re not doing that, and we’re getting penalized,’ Davis said. ‘We’re trying to be good Americans.’”

This is another important point.  I keep hearing about well off households in California refinancing giant loans while in many other states, banks simply choose to ignore those homeowners.  This kind of selective assistance is a reason why longer-term I see the mortgage interest deduction being cut back significantly for wealthier households and this will have a major impact on a state like California.  By the way, the majority of homeowners in the US don’t even itemize so the deduction doesn’t even help but of course the lobbying arm of the industry will try to complicate the facts.

The trends in 2012 largely came from the low rate interest environment and massive investor buying.  Will this keep up into 2013?  For the investor portion, we are already seeing many turn away from places like Arizona where the market is saturated.   Time will tell but those trying to apply open market economic theory here are contending with a deux ex machina with the Fed and government policy.  This is a command control housing market being driven by policy, banking intervention, and the government.

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REO by State and Owner Occupied Units by State

Update: REO by State and Owner Occupied Units by State

by Bill McBride on 10/23/2012

To help put the previous post in perspective, I’ve added the number of owner occupied units as of April 1, 2010 (from the decennial Census), and the percent of units that are REO.

REOs are only part of the puzzle. This just shows how many lender Real Estate Owned (REO) units for each state. But look at New Jersey. There are very few REOs in New Jersey, but there are many properties in the foreclosure process.

If you look at the NY Fed site, they mark the judicial foreclosure states with a black square. Many of the judicial states are backlogged. See Serious Mortgage Delinquencies and In-Foreclosure by State for graphs of the percent of loans in foreclosure and serious delinquent by state (as of the end of Q2).

Here are a repeat of Tom Lawler’s comments:

Folks interested in REO inventories by state might want to take at look at the website below from the FRB of New York. According to the FRBoNY, the data were “provided by CoreLogic under contract.”

An Assessment of the Distressed Residential Real Estate Situation

The site shows a map and you have to click on each state to get data, and I couldn’t get DC (I don’t think it was available!), but here’s the data for June 30, 2012

Number of REO by State, June 2012
Number of REO Owner Occupied Housing Units April, 2010 Percent of Units REO
Connecticut 2,345 925,286 0.25%
Maine 910 397,417 0.23%
Massachusetts 7,501 1,587,158 0.47%
New Hampshire 2,847 368,316 0.77%
New Jersey 1,979 2,102,465 0.09%
New York 2,557 3,897,837 0.07%
Pennsylvania 7,712 3,491,722 0.22%
Rhode Island 2,110 250,952 0.84%
Vermont 264 181,407 0.15%
Alabama 7,644 1,312,589 0.58%
Arkansas 1,027 768,156 0.13%
Delaware 1,163 246,724 0.47%
District of Columbia NA 112,055 NA
Florida 44,677 4,998,979 0.89%
Georgia 33,537 2,354,402 1.42%
Kentucky 4,442 1,181,271 0.38%
Louisiana 4,756 1,162,299 0.41%
Maryland 4,614 1,455,775 0.32%
Mississippi 2,907 777,073 0.37%
North Carolina 12,005 2,497,900 0.48%
Oklahoma 3,009 981,760 0.31%
South Carolina 5,775 1,248,805 0.46%
Tennessee 10,575 1,700,592 0.62%
Texas 22,528 5,685,353 0.40%
Virginia 8,810 2,055,186 0.43%
West Virginia 1,780 561,013 0.32%
Illinois 33,584 3,263,639 1.03%
Indiana 7,548 1,747,975 0.43%
Iowa 2,792 880,635 0.32%
Kansas 3,540 753,532 0.47%
Michigan 38,275 2,793,342 1.37%
Minnesota 16,761 1,523,859 1.10%
Missouri 10,821 1,633,610 0.66%
Nebraska 1,184 484,730 0.24%
North Dakota 128 183,943 0.07%
Ohio 18,533 3,111,054 0.60%
South Dakota 471 219,558 0.21%
Wisconsin 9,807 1,551,558 0.63%
Alaska 494 162,765 0.30%
Arizona 12,465 1,571,687 0.79%
California 49,299 7,035,371 0.70%
Colorado 8,596 1,293,100 0.66%
Hawaii 936 262,682 0.36%
Idaho 2,131 404,903 0.53%
Montana 826 278,418 0.30%
Nevada 7,882 591,480 1.33%
New Mexico 2,575 542,122 0.47%
Oregon 4,452 944,485 0.47%
Utah 4,193 618,137 0.68%
Washington 7,461 1,673,920 0.45%
Wyoming 905 157,077 0.58%
Total (ex-DC) 443,133 75,986,074 0.58%

Read more at http://www.calculatedriskblog.com/2012/10/update-reo-by-state-and-owner-occupied.html

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Housing Starts Boosted by FHA Loans — PragCap

Housing Starts Boosted by FHA Loans

By Walter Kurtz, Sober Look

As discussed earlier (see post) a visible increase in US housing starts we saw in September (post-recession high) should not be a surprise. It is important to keep in mind that in spite of slow household formation, households have formed at a significantly faster rate than new homes have been built since 2008.

One factor that is also at play here is the FHA provisions regarding foreclosure. The FHA guidelines require a period of 2 years from Chapter 7 filing or 3 years from foreclosure or short sale, whichever comes later. Many of those who defaulted on their mortgages after the housing crash – amazingly enough – now qualify for FHA loans. This doesn’t mean FHA loans are used entirely for new homes – it simply indicates that an increased pool of qualified buyers is creating incremental demand for single family homes. And that translates into more new homes being built.

Housing starts

Source: Barclays Capital

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WSJ: Articles on Shadow Inventory

WSJ: Articles on Shadow Inventory

by Bill McBride on 8/15/2012 

Two articles on shadow inventory …

Yesterday morning from Nick Timiraos at the WSJ: Shadow Inventory: It’s Not as Scary as It Looks

While the shadow is very large, one often-overlooked fact is that the shadow isn’t nearly as large as it was two years ago.

Barclays Capital estimates that at the end of May there were around 1.8 million mortgages in the foreclosure process and another 1.45 million where borrowers have missed at least three payments. That puts the total number of properties that could be repossessed and resold by banks at around 3.25 million mortgages.

But it is down from a peak of 4.25 million in February 2010.

[Housing analyst Ivy Zelman] published an in-depth research note earlier with the title: “Shining a bright light on the shadow: Why what’s lurking doesn’t concern us.” In it, she explains how it’s more important to focus on the pace at which foreclosures are being liquidated, and not the absolute number.

“Just like the Wizard of Oz, shadow inventory is not very intimidating once you pull back the curtain,” the report said.

And today from Timiraos at the WSJ: Shadow Inventory: Monitor Banks’ Speed, Not Just Volume

“If you don’t understand the shadow inventory, it’s very ominous and concerning,” says Ivy Zelman, chief executive of Zelman & Associates. “But if you understand the flows and how it is brought to market” it looks less intimidating, she says.

Nationally, Barclays estimates that the number of bank-owned properties will decline a bit more this year, before accelerating next year to a peak of around 575,000 in early 2014.

Meanwhile, as the shadow inventory has dropped over the past year and as banks and states have slowed down the process, demand has picked up. That’s especially the case for foreclosed properties at low price points …

I discussed some of this yesterday in House Prices and a Foreclosure Supply Shock

Read more at http://www.calculatedriskblog.com/2012/08/wsj-articles-on-shadow-inventory.html

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Foreclosure Activity Increased Nationally in 2nd Quarter

Foreclosure Activity Increased Nationally in 2nd Quarter.

First-half foreclosure activity did increase from a year ago in 20 states, including Indiana (32%), Pennsylvania (24%), South Carolina (23%), Connecticut (23%), Florida (23%), and Illinois (22%). An 18 % year-over-year increase in California foreclosure starts in June helped boost that state’s foreclosure rate to highest nationwide for the month. It was the first month California’s foreclosure rate ranked No. 1 since RealtyTrac began issuing its report in January 2005.

 Overall foreclosure activity — as opposed to properties where activity was initiated — in June decreased on a year-over-year basis for the 21st consecutive month, but foreclosure starts for the month increased annually for the second consecutive month.

U.S. properties foreclosed in the second quarter were in the foreclosure process an average of 378 days from the initial foreclosure notice to the completed foreclosure, up from 370 days in the first quarter and a record high going back to the first quarter of 2007.  Although the average time to foreclose increased nationwide, it was down in some of the states with the longest foreclosure timelines. The average time to foreclose in New York decreased from 1,056 days in the first quarter to 1,001 days in the second quarter, a 5% drop — although the state still maintained the longest time to foreclose nationwide.  The average time to foreclose decreased 3%  in New Jersey, the state with the second longest foreclosure process, and was down 1% in Pennsylvania, the state with the seventh longest time to foreclose.

 Bank-owned (REO) properties that sold in the second quarter took an average of 195 days to sell from the time they were foreclosed, up from 178 days in the first quarter. REO properties took the longest to sell in New York, at 430 days, followed by Arkansas at 357 days and New Jersey at 354 days.  U.S. properties in the foreclosure process that sold in the second quarter (typically short sales) took an average of 319 days to sell from the time they entered the foreclosure process, up from 306 days in the first quarter. Pre-foreclosure sales took the longest in New York, at 788 days on average, followed by New Jersey at 753 days and Connecticut at 630 days

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