By Julie Haviv

NEW YORK (Reuters) - Nearly one out of every three U.S. home sales in the first quarter was a foreclosure property as steep price discounts boosted demand for distressed real estate, RealtyTrac said in a new report on Wednesday.

Foreclosure homes accounted for 31 percent of all residential sales in the first quarter of 2010, with the average sales price of properties that sold while in some stage of foreclosure nearly 27 percent below homes that were not in the process, Irvine, California-based RealtyTrac said.

"In a normal market, only 1 to 2 percent of home sales are foreclosures, so this is certainly a significant level," Rick Sharga, senior vice president at RealtyTrac, said in an interview.

Total U.S. foreclosure sales in 2009 were up more than 1,100 percent from 2006 and more than 2,500 percent from 2005. Foreclosure sales accounted for 29 percent of all sales in 2009, up from 23 percent in 2008 and a mere 6 percent in 2007, the real estate data company said.

Foreclosure activity in the first quarter, however, ebbed from the previous quarter as well as year-over-year.

A total of 232,959 U.S. properties in some stage of foreclosure -- including mortgage default notices, scheduled for auction or bank-owned (REO) -- were sold to third parties in the first quarter, a decrease of 14 percent from the previous quarter and down 33 percent from the peak during the first quarter of 2009, when sales of foreclosure homes accounted for 37 percent of all residential sales.

"The drop from the previous quarter can probably be attribute to seasonality, and while the year-over-year drop is significant, it should be noted that it was down from the peak," Sharga said.

"A combination of an enormous inventory of distressed properties and an unprecedented interest by homebuyers to buy these properties boosted sales," he said.

The average sales prices on properties in some stage of foreclosure decreased 23 percent from 2006-09, while the average discounts on foreclosure purchases increased from 21 percent in 2006 to 27 percent in the first quarter of 2010.

The discounts on REOs are larger than those on pre-foreclosures, although discounts on pre-foreclosures appear to be trending higher as short sales become more common, the company said.

"First time homebuyers and investors continue to buy foreclosure properties in large numbers, and at substantial discounts," James Saccacio, Chief Executive Officer of RealtyTrac, said in a statement.

"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," he said.

Meanwhile, the Sun Belt continued to lead foreclosures nationally, with Nevada, California and Arizona posting the highest percentage of foreclosure sales in the first quarter.

Foreclosure sales accounted for 64 percent of all sales in Nevada in the first quarter -- the highest percentage of any state. The state's percentage was down from 65 percent of all sales in the previous quarter and 75 percent of overall sales in the first quarter of 2009.

California posted the second highest percentage for U.S. states, with foreclosure sales accounting for 51 percent of all sales there in the first quarter -- up from 50 percent in the previous quarter, but down from 70 percent of all sales in the first quarter of 2009.

Other states where foreclosure sales accounted for at least one-third of total sales were Massachusetts, Rhode Island, Florida, Michigan, Georgia, Illinois, Idaho and Oregon.

Foreclosures are by far one of the biggest threats to the U.S. housing market. Improvement in the housing market bodes well for the national economy, as it points to better demand in the sector where the first signs of the latest recession took root.