January 1997

Highlights

• The national composite index, summarizing responses to the Survey of Real Estate Trends, inched up to 68 in January, as improvements noted in the prior survey continued.
• In January, 38 percent of the respondents reported a strengthening of residential real estate markets during the quarter. Only five percent cited declining home sale prices, the lowest since the inception of the survey in 1991.
• Readings of the improved performance of commercial markets remained high at 43 percent, with increasing reports of rising sale prices and a larger volume of sales of commercial properties.
• Survey respondents detected gains in real estate markets in the Northeast for the fourth consecutive quarter. In the West, overall market performance declined somewhat from historical highs in the last two surveys.

Introduction

Assessments of trends in local real estate markets remained positive, according to the FDIC's latest quarterly Survey of Real Estate Trends. The survey asked market observers from all federal bank and thrift regulatory agencies in late January about developments in their real estate markets during the prior three months. Reports of improvements in housing markets continued to be frequent, outweighing reports of decline by a four-to-one margin. The proportion of respondents detecting gains in the commercial real estate sector remained high at 43 percent but slipped slightly from the previous survey, which was the highest in over two years.

National Summary: Composite Indices

The national composite index of survey results edged up slightly to 68 from 67 in October. The figure, which was in close alignment with summary readings from the past three surveys, represented a continuation of gains seen in real estate markets across the country. January's composite index was significantly improved from a year ago when the reading was 60, the lowest in more than three years.

REAL ESTATE MARKET CHANGES
OVER THE THREE MONTHS ENDING
IN JANUARY 1997
Summary Indices of Opinions of
Senior Examiners and Asset Managers



CHANGING ASSESSMENTS OF REAL ESTATE CONDITIONS
Summary Indices of Opinions of Senior Examiners and Asset Managers

Survey respondents in January were more positive about residential markets than in the October survey. Gains in local housing markets were noted by 38 percent of the respondents, up from 35 percent during the previous three-month period. Furthermore, the proportion of respondents noting deteriorating conditions declined slightly to 8 percent in January. As a result, the summary index for residential markets rose to 65 from 63 in October.

In contrast, the composite index for commercial real estate markets decreased slightly by one point to 71 in the January survey. Much of that decline was attributable primarily to less favorable changes in commercial market conditions in the West. The summary index for the West fell nine points after an unprecedented uptick in October.

The composite index and other indices reported below 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.

Gains Observed in Residential Markets

Assessments of overall housing market trends strengthened somewhat in January from the recent low reading in October. Reports of improvements were not as frequent as earlier in the year, however, suggesting that the ongoing recovery in the housing market lost some momentum by year-end. Nonetheless, several market indicators continued to fare well, according to senior examiners and asset managers.

Reports of falling housing prices are now infrequent. Nationally, the five percent reporting decreasing home resale prices was the lowest of any survey to date. Reports of rising resale prices were particularly strong in the West, where 53 percent of the respondents noted increases, up 11 percentage points from 42 percent for the previous three months.

PERCENT OF RESPONDENTS REPORTING
DECREASING RESIDENTIAL REAL ESTATE PRICES

Residential construction remained strong in January, in both the new home and rental apartment sectors. Eighty-seven percent of the participants reported new home-building at above-average or average levels, and 71 percent reported similar levels of apartment construction. Both figures, while slightly below October's readings, represent observations of vigorous construction activity. However, at this rate, the potential to overbuild in the rental sector may exist in some markets. According to the U.S. Bureau of the Census, vacancy rates for multifamily housing have been rising, from 7.6 percent at year-end 1995 to 8.0 percent in the third quarter of 1996.

There was little change in January in the balance between supply and demand of housing inventories. Twenty-five percent of the respondents reported excess supply of residential real estate in January, a repeat of October’s reading. Nonetheless, reports of oversupply were near the historical low noted last summer. In the Northeast, 59 percent of the respondents characterized supply and demand in their local housing markets as in balance, a significant improvement over the 43 percent reported a year ago.

PERCENT OF RESPONDENTS REPORTING
AVERAGE OR ABOVE-AVERAGE VOLUME OF
RESIDENTIAL CONSTRUCTION


PERCENT OF RESPONDENTS REPORTING
EXCESS SUPPLY IN REAL ESTATE MARKETS

Commercial Real Estate Improvements Reported to Slow

In the January survey, 43 percent of the respondents reported gains in commercial real estate markets, slightly down from October's 46 percent. Evaluations of deteriorating conditions were rare, however, with only two percent noting that conditions in local commercial markets were worsening.

The survey results showed that com-mercial real estate markets in every region are plagued less and less by overhangs of floorspace from previous overbuilding. Reports of excess supply have decreased steadily for four years, and only 25 percent of those queried cited excess commercial space. A record proportion of observers in the Northeast characterized supply and demand in their local markets as in balance, notably in Massachusetts and New Jersey.

PERCENT OF RESPONDENTS REPORTING
COMMERCIAL REAL ESTATE MARKETS WERE . . .

Demand for space in the key office sector has been strong, particularly during the past year, contributing to the decline in excess supply. In January, 38 percent of the respondents observed a significant pick-up in demand, up from 24 percent a year ago.

Evaluations of commercial property transactions continued to improve in January. Nationally, 41 percent of those surveyed noted rising sale prices of commercial properties. In addition, 25 percent of the respondents observed an above-average volume of commercial sales. Reports of increasing sales were the most frequent of any survey to date in both the Northeast and the West, particularly in California. The 27 percent of California observers noting rising volume of commercial property sales was a significant jump from the 12 percent in October.

PERCENT OF RESPONDENTS REPORTING
INCREASES IN DEMAND FOR OFFICE SPACE

Regional

With a composite index of 69 — the highest in 2½ years — survey respondents in the Northeast continued to report a strong upswing in real estate markets. Assessments of trends in commercial markets in the Northeast were the most positive of any survey to date. In January, 46 percent reported gains, up from 39 percent in October. When queried for details, respon-dents noted a significant increase in sales of commercial properties and an uptick in demand for office space.

With respect to residential real estate markets in the Northeast, the summary index of 66 was well-above the survey low of 52. Participants in this January survey noted with greater frequency rising home sales, while fewer reported falling home sale prices.

CHANGING ASSESSMENTS OF REAL ESTATE CONDITIONS IN THE NORTHEAST
Summary Indices of Opinions of Senior Examiners and Asset Managers

Examiners and asset managers elsewhere in the country continued to report positive news about their local real estate markets. In the Midwest, both the commercial and residential markets rebounded in January from weaker readings in October, as more respondents noted improvements in their local real estate markets.

In the South, residential markets reportedly lost momentum since last spring. Thirty-seven percent of the respondents reported better housing conditions in January; in April that proportion was at an 18-month high of nearly 50 percent. In the West, the regional composite figure of 76 remained near recent high readings. However, the total was held down by responses from California, where the proportion reporting gains in both commercial and residential markets was down slightly in January from October.

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 297 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 Resolutions and Receiverships. 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 due, in part, to declining inventories of real estate assets in receivership from failed banks.

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

APPENDIX

SUMMARY INDICES OF REAL ESTATE TRENDS

Improving market: Index Value greater than 50
Declining market: Index Value less than 50

Notes to Users: The indices presented above were compiled for both residential and commercial real estate markets for the four major U.S. Census Bureau regions. Each regional index is a summary measure of the respondents' opinions about changes in market conditions in the past three months. The number of respondents by region was: Northeast (58), South (100), Midwest (84) and West (55). The national totals include a small number of responses that could not be classified by region.

In constructing the index, a value of 100 was assigned to responses indicating the conditions were "better," and a value of 0 was given to responses saying conditions were "worse." A "no change" answer was assigned a value of 50. Commercial and residential indices at the regional level are the sum of these values divided by the number of respondents in that region for that type of property.

Composite indices at the regional level are the weighted average of the residential and commercial indices for each region. The weights for each region are calculated using the value of construction permits for residential and commercial markets from 1982-1991. National indices are weighted averages of the comparable market measure of each region. The data for both the residential and commercial market weights are from the U.S. Bureau of the Census.

An index value of 50 indicates that the examiners and liquidators responding to the survey believe there has been no change in trends over the last three months. In this case, the opinion of respondents is either unanimous that there has been no change or is, on average, evenly distributed between those who believe the market has improved and those who believe the market has declined. An index above 50 generally indicates that, in the opinion of most respondents, the market has improved over the last three months, while an index below 50 indicates a belief that market conditions have declined over the period. The further the index is from 50 either higher or lower the more there is agreement among the respondents about recent market trends.

Census Regions:

• Northeast:
  Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont
  
  
• South:
  Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, West Virginia
  
  
• Midwest:
  Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin
  
  
• West:
  Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming
  

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