There is fast becoming a large divide in foreclosure activity between states that require a judge in the foreclosure process and those that don’t. The latter, which include formerly hard-hit states like California, Michigan and Arizona, are non-judicial, and foreclosures there have cleared the process faster. In states like New York, Florida, New Jersey, Ohio, and Illinois, where a judge is required, the picture is still bleak. (Read More: Top States for Business 2012.)

Foreclosure activity jumped on a year-over-year basis in 14 out of the 26 judicial foreclosure states. New Jersey saw a 130 percent increase, New York a 53 percent jump and Pennsylvania a 35 percent increase. This will make it harder for overall home prices to improve in those states, as distressed home sales bring values down. (Read More: Why Him Refinancing Boom Is Different This Time.)

It is a far different story in California, where overall foreclosure numbers are still high, but are down 45 percent from a year ago, according to RealtyTrac. Eager investors, as in Arizona, are standing ready to buy distressed properties, but they are finding little supply, and that is putting upward pressure on prices at the low end.

The inventory of lower-priced homes, in fact, is down more than 40 percent in California from a year ago, according to a new report from Zillow
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]. That is making it harder for first-time home buyers, who are in competition with often all-cash investors.

“First-time homebuyers are being squeezed out of the market by falling inventory and the rapid influx of investors looking to buy basic homes to rent out to the growing population of people who have recently been foreclosed upon,” said Stan Humphries, Zillow chief economist. “Investors are paying in cash and can close sooner, which is more favorable to banks and homeowners looking to sell.” (Read More: Apartment Demand Ebbs as ‘Avalanche’ of New Units Open.)

Supplies of lower priced homes are also down nationwide, 15 percent, according to Zillow, but the numbers differ dramatically state-to-state. While investors have focused on the markets out West and Florida, where the housing crash hit hardest, they may now have to turn to new locations, where they will find better deals. As home prices rise in Arizona, Nevada and California, the margins for profit shrink.

Make no mistake, despite nine consecutive quarters of annual drops in foreclosure activity, there are still 3.4 million homes that have either delinquent loans or are already in the foreclosure process, according to LPS Applied Analytics. Volumes of distressed properties will jump dramatically in judicial states throughout 2013, according to several surveys, so while the overall housing market is improving, recovery, like everything else in real estate, will be highly local.

—By CNBC’s Diana Olick; Follow Her on Twitter @Diana_Olick and Facebook.

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