By Diana Olick, CNBC Real Estate Reporter NEW YORK ( CNBC) -- The housing market appears to be surging ahead suddenly on all cylinders, but that does not mean it is free of the remnants of its recent downfall. The number of distressed home sales, either bank-owned or short sales, may be shrinking, but it is still making up a significant share of the overall housing market. Foreclosure-related sales made up 21% of all U.S. sales in 2012 and short sales, when the home is sold for less than the value of the mortgage, made up 22%, according to a new report from RealtyTrac. Add it up and 43% of all 2012 sales were of distressed properties. Banks are making more of an effort to do short sales instead of taking a home to foreclosure, and new federal guidelines are streamlining the process. That led to a 15% drop in sales of bank-owned homes and a six percent increase in short sales. This has helped home prices because short sales on average sell for a higher price than do bank-owned homes, because they are usually neither abandoned nor vandalized.
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"Inventories continue to be low because non-distressed sellers are largely absent from the market, apparently waiting for prices to increase even more before they decide to sell," noted Blomquist. "I think we are seeing signs of the shadow
foreclosure supply hitting, but more on a market-by-market basis and often in the form of short sales as opposed to REO bank-owned sales -- although REO sales are starting to show signs of life in judicial foreclosure markets with bigger backlogs." Strong investor demand for these properties is pushing prices higher, even creating bubbles in some of the formerly hardest hit markets, like Phoenix and Las Vegas. If prices get too high, however, and investors can't reap the returns they need, then supplies could grow. So far that has not happened, but home prices are rising far faster than anyone predicted. --Written by Diana Olick at CNBC