A recent report issued by the National Association of Realtors

(TheNicheReport) — A recent report issued by the National Association of Realtors indicates that existing home sales during June were down by more than five percent compared to May, and this downturn is directly related to a drop in foreclosures.

A drop in foreclosures is normally thought of as a positive aspect of a real estate economy. When mortgages end up in default and later cause properties to be listed as distressed assets, valuations diminish and the housing market is negatively affected -at least in normal situations. The American housing market, however, has been far from normal over the last few years.

Since the drastic downturn of the housing market in the United States back in 2007, distressed properties have played a major role in preventing total stagnation of real estate activity. Many families who were uprooted from the suburbs have voted with their feet and are moving in greater numbers to large metropolitan areas, only this time they are not in the market to purchase homes. They are looking for rental homes and apartments, and real estate investors have paid attention to this trend.

After a few years of uncertainty, banks are finally easing up on their portfolios of distressed assets. Since the banks are now bound by the terms of the National Foreclosure Agreement signed earlier this year, they have been more proactive in allowing short sales and easing up on the restrictions they had previously imposed on their Real Estate Owned (REO) portfolios. Investors have been snapping up these properties in the hope of profiting from the red-hot rental markets, and now the REO portfolios are dwindling away.

Some neighborhoods in California have been enjoying brisk real estate activity over the last three years; distressed properties, however, have made up a significant portion of the sales -more than fifty percent in some cases. Investors are clearly interested in bargain deals that can yield handsome profits as rental properties, but now that the inventory of distressed properties is drying up real estate analysts are concerned about the possible outcomes.

With REO portfolios drying up and short sales diminishing, the housing market could see a new a slump after several months of a slight recovery. Mortgage defaults and delinquencies are still being experienced across the nation; the number of completed foreclosures, however, is not expected to rise at the levels since from 2008 to 2011. A lack of supply of distressed homes at this time will keep investors on the sidelines and slow down the recovery of the housing market.