* (Getty Images North America)

Homes in metro Denver neighborhoods that previously appeared insulated from the housing crisis are seeing a decline in prices as foreclosures and short sales tick up. Meanwhile, those communities that were hit hardest are showing signs of improvement.

While foreclosures and short sales — known collectively as "distressed sales" — still make up a larger share of the market in lower-priced neighborhoods, the slight decline in those sales is expected to help prices there stabilize.

"If you're in a neighborhood where the number of distressed sales is increasing, it's going to push prices down," said Lon Welsh, managing broker of Your Castle Real Estate. "If you're in a neighborhood where the number of distressed sales is declining, you should see values improving."

An analysis of Metrolist data by Your Castle showed that homes priced at $461,000 or more saw the distressed sales increase from 12 percent of the total volume in the first quarter of 2008 to 17 percent in the second quarter of 2010.

Meanwhile, 69 percent of homes sold in the $95,000-$149,000 price range during the second quarter of this year were distressed, down from 84 percent of the total in the first quarter of 2008.

Overall, sales of distressed homes accounted for 42 percent of the market from January through June this year, down from 49 percent during the same period a year ago.

The movement of distressed sales into the higher-end market is putting noticeable pressure on prices in the luxury market.

Luxury real estate specialist Edie Marks has dropped the price on several homes, including the one at 11 Blackmer Road in Cherry Hills Village. The 14,657-square-foot home started at nearly $8 million. She recently put it under contract for just over $2 million.

Marks predicts that the deals people are finding as a result of short sales ultimately will result in fewer foreclosures in the upper-end market.

"People are watching," she said. "They know what the deals are, and they're starting to grab them. That's what's going to prevent us from having more foreclosures."

Even in neighborhoods without million-dollar price tags, the changing dynamics are apparent.

In neighborhoods such as Commerce City's Rose Hill, where the average home price is $93,000, the number of distressed sales declined 17 percent in the first half of the year compared with the same period a year ago.

"Some cracks in the dam"

But in Platt Park, 16 percent of the homes sold were considered distressed sales — nearly double that of a year ago. The average sales price in the neighborhood is $339,000.

"Platt Park is a pretty nice area and has been pretty insulated, but we're starting to see some cracks in the dam," Welsh said. "It will have a negative impact on pricing in the area."

The analysis by Your Castle also revealed a shift in the mix of distressed sales, with the number of foreclosures declining by about 50 percent and the number of short sales doubling.

With a short sale, the lender agrees to allow a house to be sold for less than what is owed on the mortgage. While they wind up taking a loss, it avoids the foreclosure process.

"As home prices drop, it takes a lot more potential people into that pot who are forced to do a short sale," said economist Jeff Thredgold of Vectra Bank Colorado. "At the same time, you've got lenders looking at the inevitable. Values aren't holding up, and there are different government programs that provide incentives for lenders to do short sales or write down a loan on a refinance."

Saving a client's credit rating

Many real estate agents promote short sales as a way to save a client's credit rating, which could account for the increase, said Jerra Ryan, vice president of the Colorado Mortgage Lenders Association and Cherry Creek Mortgage.

Real estate broker Ron Woodcock of ReMax/Southeast said it often costs banks more to foreclose on a property than the loss they'll take through a short sale.

But, Woodcock said, it's more difficult to do a short sale now than it has ever been.

"Where we're running into problems is with loans that have mortgage insurance on them," Woodcock said. "The banks could care less because they don't lose anything."

Wells Fargo has been encouraging short sales over foreclosures for some time, but the process can be complicated, said Cristie Drumm, spokeswoman for the bank.

"If Wells Fargo is the servicer but doesn't hold the note, the investor has to approve the short-sale offer," she said. "It's not always just as simple as 'I found a buyer and here's what they'll pay.' There can be a lot of parties that have to give approval."

But the bank prefers to work with borrowers to keep them in their homes if at all possible, Drumm said.

"We always start with looking at what modification might be an option," she said.

Margaret Jackson: 303-954-1473 or mjackson@denverpost.com