As mortgage interest rate falls, it decreases the bankruptcy risk of the borrowers and, hence, decreases distressed sales.
Prices would have gone down even further had not transactions dried to a trickle (see chart). Owners are loth to sell into a falling market, although some distressed sales are occurring.
When we talked to Mark Zandi last month, he said it's likely to be a year or so before the percentage of distressed sales falls and the housing market gets back to some semblance of normalcy.