NEW YORK (MainStreet) — Foreclosure inventory continues to fall, pointing to more signs of an improving housing market.

According to new data from RealtyTrac, short sales and foreclosures accounted for only 13% of sales during the third quarter, compared to 14.2% for the second quarter. This is the lowest level since the first quarter of 2011, when the firm began following such data. A short sale is when a bank absolves a home’s negative equity.

“Even as the share of distressed sales decreases, the average discount on distressed properties continues to be substantial, because the primary factors driving that discount are still in place,” said Daren Blomquist, vice president of RealtyTrac. “Distressed properties are typically in poor condition and have a highly motivated seller — whether that seller is the distressed homeowner in foreclosure or the bank that has repossessed the property through foreclosure.”

Rising foreclosures in communities isn’t an encouraging sign, as distressed properties tend to bring down the value of surrounding properties.

The falling foreclosure rates also have to do with a growing number of properties that have finally finished the foreclosure process, even six years after the recession when foreclosures were widespread.

This is because foreclosures in judicial states are finally exiting the process and leaving the market. Foreclosures in these states are routed through the courts, which is a lengthy process.

“Over the last 18 months a lot of inventory that was pre-foreclosure moved through the foreclosure process, and states that have a longer judicial process cleared a lot of their cases after the bank settlements a couple of years ago,” said Dani Babb, broker and president of The Babb Group Real Estate, Inc. “With prices increasing, many sellers were also able to refinance their home, because they were no longer under water and avoid the foreclosure process altogether.”

Prices have been increasing, although at a slower rate in recent months. The S&P Case-Shiller Home Price Index, which measures home prices of 20 metropolitan cities, rose 5.6% year-over-year as of August, the latest reading, compared to a 6.7% yearly rise in July.

“The deceleration in home prices continues,” said David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices.

The softening in prices isn’t too unexpected, since the index is up a staggering 29.5% since its March 2012 dip. There are plenty of factors keeping prices from skyrocketing, including the difficulty prospective buyers face in saving for a down payment on a home mortgage, which is keeping them on the rental side. Not to mention burdensome student loan debt, which is also causing consumers to postpone home purchases, especially Millennials.

- Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE.