Real estate agents report banks are keeping foreclosures off the market in hopes of higher prices, a practice that is temporarily reducing the percentage of distress sales but lengthening the foreclosure timeline.

The share of distressed properties in the housing market fell to a three-and-a-half-year low in April, falling to 33.0 percent in April, based on a three-month moving average. That was not only down from 35.6 percent in March, but also a very sharp drop from the 43.6 percent distressed property market share seen a year ago, according to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking

However, there also are reports from real estate professionals participating in the survey that many banks are holding back their sale of foreclosed properties until home prices climb further. As a result, there is the potential for a spike in distressed property sales in the coming months.

In the past year, charges that lenders have sought to manipulate REO process have increased as foreclosure inventories have declined.

In EForeclosure Magazine last April, Wells Fargo senior economist and vice president Scott Anderson explained that withholding a number of foreclosure properties for sale from the real estate market is a deliberate effort on the part of lenders to abate the drastic decline in home prices.

Results from a study of the foreclosures market showed that only one third of repo homes are being marketed for sale. Anderson added that if banks will release all foreclosure properties on their portfolios for sale, property values will surely take another steep plunge.

Anderson pointed out that withholding foreclosure properties from the market could greatly impact the balance sheets of lenders and for any individual who will try to sell a home or seek mortgage refinancing.

In studies for AOL Real Estate last year, RealtyTrac found that just 15 percent of REOs in the Washington, D.C., area were for sale, a statistic that is representative of nationwide numbers, the company said. CoreLogic provided an even lower estimate, suggesting that just 10 percent of all REOs in the country are listed by their owners, which include Fannie Mae and Freddie Mac as well as the Federal Housing Administration. As of April 2012, 390,000 repossessed homes sat in limbo, while about 39,000 were actually listed for sale, said Sam Khater, senior economist at CoreLogic.

The drop in distressed property activity in April was accompanied by a parallel dip in the percentage of purchases attributable to investors, the latest HousingPulse numbers show. Investors accounted for 21.6 percent of home purchase transactions tracked last month based on a three-month moving average. That was the lowest investor share recorded since November.

Foreclosed properties in need of repair – or so-called damaged REO – remain the largest category of purchases by investors. Typically, investors buy these properties, fix them up, and then turn them into rental housing.

Last month investors accounted for 62.8 percent of damaged REO purchases, HousingPulse numbers show. This compared to a 63.9 percent share in March and a 60.4 percent share a year earlier.

But investors have been purchasing more properties via short sales. In April, investor purchases involving short sales jumped to a record-high of 35.3 percent, according to HousingPulse. This was up from 31.8 percent in March and 30.5 percent a year earlier.

Despite the general slide in investor home purchase activity, real estate agents reported in the April HousingPulse survey that hedge funds and Wall Street investors have become very active in California, Florida and Nevada. Most of these investors appear to have a buy and rent strategy, and are competing with first-time homebuyers for moderately priced properties.