Distressed properties — those in some stage of foreclosure — edged up to 28% of all U.S. residential sales in the first quarter from 27% the previous quarter, according to RealtyTrac.

The percentage would have been higher, analysts say, but overall housing demand is weak and the banks are not disposing of these assets at nearly the rate they were at the same time last year, when distressed properties made up 29% of all sales.

The numbers tell the story: In the first quarter of this year, 158,434 bank-owned properties (or those in the foreclosure pipeline) were sold, a 36% decline from the first quarter of 2010 and a 16% decrease from the fourth quarter of last year.

Compare that with the nearly 350,000 distressed properties sold in the first quarter of 2009, and you can see why the foreclosure pipeline is so bloated.

"According to our numbers, if you just look at the properties in foreclosure or on the banks' books, it will take us three years to work through that inventory at the current rate of sales," says Rick Sharga, senior vice president of RealtyTrac.

Of course, this slowdown in foreclosure sales is — at least in the short term — a good thing for the housing market, helping to keep home prices more stable, Sharga says.

"The downside is that this approach ensures that we will be in the doldrums in housing for several more years," he says.

Indeed, with such a large supply of distressed properties and foreclosures, the timing of a recovery hinges in part on how quickly banks and servicers dispose of these holdings.

Foreclosure bargains
The average sale price of properties in some stage of the foreclosure process — from default to bank-owned — was $168,321 in the first quarter, down 1.9% from the fourth quarter of last year and 1.5% from the first quarter of 2010, according to RealtyTrac.

Homes in some stage of foreclosure traded on average at 27% below the average for standard sales — a bigger discount than the 26% discount posted in the first quarter of last year.

Bank-owned properties sold for the largest discount — 35% on average, slightly more than the 33% discount taken by lenders at the same time last year.  A total of 107,143 bank-owned homes sold in the quarter, comprising 19% of sales.

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Pre-foreclosure properties — those in default or scheduled for auction (often short sales) — sold for an average discount of 9%, an improvement from the 14% average discount taken on them in the first quarter of last year. Sales of 51,292 such properties were recorded in the first quarter, down 45% from the same period last year.

While sales in this category overall were much lower than last year, some reports point to a recent pickup in short sales. That's what Luis Mendoza, a real-estate agent with Century 21 Award in San Diego is seeing in his area.

What's your home worth?

"I have seen a huge increase in short sales," Mendoza says, as some loan modifications have fallen apart. These short sales are bargains too, he says, trading at about a 15% to 20% discount to the houses around them.

This decline in prices is making mortgage payments rival rents in many areas. In downtown San Diego, he says, a two-bedroom condo can be rented for $2,500 a month, or bought for the same monthly mortgage payment.

Indeed, affordability has gotten a larger number of investors out in the market, says Christian deRitis, director of consumer credit analytics at Moody's Economy.com.

"They're buying up foreclosures, fixing them up and turning around and renting them," he says.

Foreclosure hot spots
Not surprisingly, the most foreclosure sales are being posted in boom-and-bust areas of the West.

Sales of properties with foreclosure filings accounted for 53% of all residential sales in Nevada during the first quarter, the highest of any state, but down from 59% in the first quarter of 2010. Because so many of the sales there are foreclosures, and have been for so long, the discount rate is declining, Sharga says, reaching 18% in the first quarter.

California foreclosures accounted for 45% of all residential sales during the first quarter, up from 43% in the previous quarter, but down from 48% at the same time last year.  The average foreclosure property in the Golden State sold for 34% less than the average price of homes not in foreclosure.

Foreclosures made up 45% of all residential sales in the first quarter in Arizona, down from 50% the previous quarter, and 47% in the same period a year earlier. Foreclosures here traded for a 25% discount to the average traditional listing.

Other states where foreclosures accounted for at least one-quarter of all sales were Idaho, Florida, Michigan, Oregon, Virginia, Colorado, Illinois, Georgia and Ohio.

The biggest discounts on foreclosure properties were in Ohio and Illinois, where foreclosures traded at an average 41% discount to the average nondistressed listing.