More than 232,000 properties in some stage of foreclosure were sold during Q110, taking up 31% of all residential sales, according to RealtyTrac, an online foreclosure marketplace. But that total is dropping. RealtyTrac included properties either in default, scheduled for auction or in REO status as part of the total. These transactions have dropped 33% from their peak in 2009 when they took 37% of all residential sales. The Q110 total is also a 14% decline from the previous quarter. Banks are slowing the rate at which they file foreclosures on homes. Foreclosure filings have dropped from the month before in April, and May, according to RealtyTrac. But they are increasing the rate at which they’re repossessing the backlog. James Saccacio, CEO of RealtyTrac, said first-time homebuyers and investors are still buying foreclosure properties in large numbers and at big discounts. Buyers of these properties saw discounts rise to 27% from retail prices in Q110. REO discounts are still larger than transactions in pre-foreclosure, but the gap is shrinking, as short sales are growing more common. Bank of America has put in a policy of “doing everything possible” to conduct a short sale ahead of foreclosure. Even though the foreclosure market is shrinking, it is still large by historical standards — there were 1.2m foreclosure sales in 2009, more than 25 times the amount in 2005. There were more than 144,000 REO sales in Q110, down 13% from the previous quarter and down 27% from Q109. REO sales accounted for 19% of all sales in Q110, up from 16% in the last quarter but down from 21% in Q109. Pre-foreclosure sales, often short sales, had the same trend. There more than 88,000 pre-foreclosure transactions in Q110, down 15% from the last quarter and down 41% from last year. But they took up 12% of all sales, up from less than 10% in the previous quarter but down 16% from Q109. Foreclosure sales took up 64% of the Nevada market in Q110, the highest percentage of any state.  It is down from 65% in the previous quarter and below the 75% in Q109. California came in second. There, foreclosure sales took up 51% of the market, up slightly from 50% in the previous quarter. Arizona was third, with 50% of sales being foreclosure sales. But the highest discounts came in Ohio, Kentucky, and Illinois. In those three states, the average sales price of properties that sold while in some stage of foreclosure in Q110 was 39% below the average sales price on retail homes. “As lenders have begun repossessing homes at record levels over the first half of 2010, it will be interesting to watch how they will manage the inventory levels of distressed properties on the market in order to prevent more dramatic price deterioration,” Saccacio said. Write to Jon Prior.