Highlights

• The composite index, summarizing responses to the FDIC's Survey of Real Estate Trends, edged down just barely to 67 in October, as more frequent reports of improving commercial market conditions were offset by slightly less positive assessments of housing market trends.
  
• Readings of conditions in commercial real estate were decidedly more upbeat in October. Almost half (46 percent) of the participating examiners and asset managers queried noted improvements in their local markets -- the highest proportion in over two years.
  
• Solid gains were observed in commercial markets in the West, where 68 percent reported better conditions, the highest reading yet. The region's gains were paced by the significant improvements noted in California's commercial markets.
  
• The recovery in housing markets appears to be slowing somewhat following gains reported earlier in the year. Nonetheless, in October, 35 percent of the respondents cited improvements versus nine percent who indicated markets were weakening.
  

Introduction

Respondents to the FDIC's Survey of Real Estate Trends in October continued to be positive about trends in their local real estate markets. The proportion of those surveyed who reported improving conditions in commercial markets was the highest in over two years, representing one of the most favorable assessments in the 5 1/2 years that the survey has been conducted. However, the October results indicated that housing markets, while still quite strong, did not gain as much as observed earlier in the year. The quarterly survey, conducted in late October, polls federal bank and thrift regulatory experts about developments during the prior three months in their local real estate markets.

National Summary: Composite Indices

The national composite index of survey results stood at 67 in October virtually unchanged from the past two readings. The recent readings, however, represent an improvement over last year. In October 1995, the composite figure was 64.

REAL ESTATE MARKET CHANGES
OVER THE THREE MONTHS ENDING
IN OCTOBER '96

Summary Indices of Opinions of
Senior Examiners and Asset Managers

The slight downturn in October's index was attributable primarily to less favorable changes in housing market conditions. The national residential index slipped to 63 from 69 in July. In contrast, survey respondents in October were the most positive in over two years about commercial real estate markets. The summary index for commercial markets rose to 72, buoyed by the particularly strong index figure in the West, which rose more than ten points.

CHANGING ASSESMENTS OF REAL ESTATE CONDITIONS

Summary Indicies of Opinions of Senior Examiners and Asset Managers

The composite index and other reported indices summarize responses to the question of whether real estate markets have improved, deteriorated, or remained the same during the prior three months. Values above 50 indicate that more examiners and asset managers at federal bank and thrift regulatory agencies thought conditions were improving rather than declining. Values below 50 indicate the opposite. A value of 50 indicates either a balance between those reporting improving versus worsening conditions or agreement that conditions were unchanged.

Respondents Continue to See Solid Gains in Commercial Real Estate

The marked increase in positive assessments of commercial market conditions in October suggests that the recovery in this sector is spreading to new markets. Almost half (46 percent) of the respondents in October reported improving conditions, up from 38 percent in the July survey. Only two percent noted a weakening of activity; when the survey began in April 1991, 28 percent reported worsening commercial conditions.

Assessments of both the sale prices and volume of sales of commercial properties remained very positive in October. Average or above-average sales of commercial properties were reported in 84 percent of the markets, and increasing sales prices were reported in almost 40 percent. In some parts of the country, conditions are even hotter, with average or above-average commercial property transactions noted by just over 90 percent of respondents in the South and 100 percent of those in the West outside of California.

The key office building sector continues to show signs of improvement. For example, assessments of demand for office space in local markets has been increasing steadily, with 31 percent of the respondents observing a pick-up in demand in October. When this question was first asked in May 1992, only ten percent responded affirmatively. In addition, as has been the case for the past several surveys, 29 percent of the respondents observed rent concessions less frequently. In May 1992, the comparable figure was 13 percent.

PERCENT OF RESPONDENTS REPORTING
INCREASES IN DEMAND FOR OFFICE SPACE

Survey participants continued to witness steady progress in reducing the oversupply of commercial floorspace. The 29 percent who still reported excess supply in their local markets was the lowest figure since the survey began, representing a decline of 12 percentage points from a year earlier. Although a relatively high 52 percent of the respondents in the Northeast continued to note excess supply in their local markets, the figure reflects a significant improvement from the 91 percent figure reported just three years ago. Some markets are heating up, so much so that growth in demand may outstrip growth in supply. A tight market was noted in 35 percent of the markets in the West outside of California, compared to the national average of six percent.

Residential Real Estate Improvements Reported to Slow Somewhat

Respondents were somewhat less positive in October about the strength of the housing recovery than earlier in the year. Fewer of those queried in October observed general market improvements. In fact, the 35 percent who reported gains in their local housing markets during the past three months was ten percentage points lower than the proportion citing improvements in the two previous surveys. Nonetheless, reports of improvements outweighed those of decline by a three-to-one margin.

Furthermore, slightly more reported deterioration in supply conditions, with 25 percent indicating that their local housing markets were characterized by excess supply in October. Although this figure is near the survey-low seen in July, it represents an initial, albeit slight, retreat from recent gains in housing market activity.

Responses to more-detailed questions also pointed to some slight moderation in the generally very strong picture of the residential market. Forty-nine percent of respondents in October observed increasing prices in their local markets, down somewhat from 51 percent in July. The 37 percent reporting improving home sales remained near high levels, but slightly below the July reading.

In contrast, reports regarding the residential construction sector continued to be increasingly positive. The proportion of respondents noting above-average or average construction rose to survey-highs of 88 percent for new homes and 72 percent for rental apartments. Apartment construction reportedly was robust in the South and the Midwest but continued to be lackluster in the Northeast, where 66 percent of those surveyed observed below-average apartment activity.

Regional Trends

Assessments of real estate market conditions were positive in all regions in October, with the Northeast reporting the most sizable rate of change from July's results. Its regional composite index of 66 was the highest reading in two years, boosted by reports of gains in both commercial and residential markets. Results were also quite positive in the South (69) and Midwest (59). However, in terms of improvements, the West had the highest reading, as indicated on the map on the next page.

Reports of gains in real estate markets in the West where respondents have seen steady progress during the past year continued in October. Assessments of commercial markets were overwhelmingly positive, with a record commercial index of 83. Sixty-eight percent of the respondents reported improved commercial markets; only two percent noted declines. On the residential side, 55 percent of the examiners and asset managers witnessed strengthening in the West, down from 66 percent in July. Nonetheless, this proportion represented a vast improvement over the year-earlier figure of 25 percent.

The favorable assessments from the West reflect the increasingly positive responses from observers in California. In little over a year, observations of improving market conditions have increased dramatically. Almost two-thirds (64 percent) of the respondents witnessed improving conditions in commercial markets, up from 39 percent in July. Seventy percent of the October respondents reported strengthening housing markets. Responses to more detailed questions indicate that the reported recovery in California's commercial and residential markets is reinforced by increasing home sales and residential construction, as well as rising commercial property sales and an uptick in demand for office space.

Data and Method of Presentation

The survey results presented at the end of this report are summarized in indices calculated by Census regions for both residential and commercial real estate markets. The national indices are an aggregation of the regional results. The survey consisted of 310 interviews of examiners and asset managers experienced in evaluating real estate loan portfolios or marketing real estate assets. The respondents at the FDIC represent the most senior experts from the Division of Supervision and from the Division of Depositor and Asset Services. Senior real estate examiners from the Office of the Comptroller of the Currency, the Federal Reserve System, and the Office of Thrift Supervision also participated. It should be noted that the number of respondents in the survey is down considerably from the 500-plus when the survey was initiated in 1991. This decline reflects both the fact that the survey included a large number of asset managers from the RTC, which sunset at year-end 1995, and recent agency downsizing efforts.

The survey was designed and analyzed by the Division of Research and Statistics at the FDIC. Questions may be directed to James L. Freund (202-898-3960), Cynthia Angell (202-898-8548), or Daniel Bean (202-898-3931). Geri Bonebrake, Donna Schull and Lisa Peterson provided production support. Market Facts, Inc. conducted the survey under the management of Kent R. Kroeger.