Lenders also took back the fewest number of homes last year since 2007, at the dawn of the foreclosure crisis, foreclosure listing firm RealtyTrac Inc. said Thursday.
While foreclosures remain elevated in many populous states, such as Florida, New York and California, they have been steadily declining since the U.S. housing market and economy began to rebound after years of decline.
The U.S. housing market has emerged from a deep slump, aided by rising home prices, steady job growth and fewer troubled loans dating back to the housing-bubble days. Meanwhile, more homeowners are keeping up with their mortgage payments.
That's led to fewer homes entering the foreclosure pipeline.
Foreclosure starts totaled 747,728 last year. That's down 33 percent from a year earlier and the lowest annual level since 2006, before the housing bubble burst.
All told, foreclosure starts fell in 37 states, including California, Arizona, Colorado and Georgia, but posted annual increases in 13 states, including Maryland, Arkansas, New Jersey, Connecticut and New York, the firm said.
"Foreclosure starts are a leading indicator that we're getting back to normal, and those are back to normal, back to 2006 levels," said Daren Blomquist, a vice president at RealtyTrac.
While also down sharply, completed foreclosures—when a home ends up repossessed by a lender—have further to go before returning to normal levels, Blomquist added.
Banks took back 462,970 U.S. homes last year, down 31 percent from 2012 and the lowest level since 2007, RealtyTrac said. Foreclosures peaked in 2010 at 1.05 million and have been declining ever since.
Completed foreclosures declined on an annual basis in 38 states, including California, Texas, Arizona, Georgia and Michigan. They increased in a dozen states, including Maryland, Arkansas, Washington, New York and Oklahoma.
As of December, more than 1.2 million properties nationwide were in some stage of the foreclosure process or owned by banks, but not yet sold. That's a decline of 19 percent from a year earlier and 44 percent below their peak of more than 2.2 million homes in December 2010, the firm said.
Most of the homes in some stage of foreclosure are tied to mortgages that were taken out between 2004 and 2008.
As 2013 drew to a close, Florida remained the nation's foreclosure hotbed. The state had 306,018 homes in some stage of foreclosure or owned by banks in December. That amounts to a quarter of the national total.