An increase in distressed properties on the market is no longer chipping away at overall home prices, an “unusual and encouraging” sign, a new report suggests.

In fact, the report found that in the top 15 metro areas REOs dramatically increased in February, but those areas still showed average gains or mostly stable home prices compared to the previous month, a new report by Clear Capital shows. Distressed properties typically are known to put downward pressure on nearby home prices.

Alex Villacorta, director of research and analytics at Clear Capital, says improvements in the job market, an uptick in consumer confidence, and an increase in activity among investors making cash purchases may be helping to pull home prices up and “could be in play with the resiliency we’re seeing in prices against increasing REO this month.”

Overall, national home prices dropped 1.9 percent year-over-year, which is the smallest margin drop in 10 months, according to Clear Capital’s March housing report.

“Home prices across the nation saw light levels of depreciation in February, consistent with the trend we have seen over the last several months,” Villacorta noted. “However, the Northeast, Midwest, and West improved performance against last month’s quarterly declines in light of increases in REO saturation, which is unusual and encouraging.”

With the uptick in REO activity, however, “we’ll be keeping a very close eye on the effects of theattorneys general settlement with servicers, as it could dramatically change the flow of REO properties moving through the foreclosure process and significantly impact values in the near future,” Villacorta said.

Source: Clear Capital and “Home Price Declines Resilient Against REO Saturation: Clear Capital,” HousingWire (March 5, 2012)