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Survey of Real Estate Trends

January, 1996



Highlights
  • The national composite index, summarizing responses to the FDIC's Survey of Real Estate Trends, slipped to 60 in January. While reports from many markets continued to cite improvements, gains were less widespread than in recent surveys.
  • The weaker results primarily reflect a narrowing in the recovery in residential real estate. The 28 percent of respondents reporting gains in housing markets in January was the lowest proportion in the survey to date.
  • In January, overall assessments of trends in commercial real estate markets remained positive. Of particular note was the continued decline in reports of oversupply conditions.
  • The West registered a sharp increase in reports of improvements in commercial real estate markets. However, the most frequent reports of improving real estate markets continued to come from the South.


Introduction

The overall reading of real estate market conditions in the FDIC's January Survey of Real Estate Trends was the least positive assessment since late 1992. The latest results primarily reflected weaker evaluations of residential markets. Readings of the performance of commercial markets remained relatively strong. The quarterly survey, conducted in late January, polls field personnel from all federal bank and thrift regulatory agencies about developments during the prior three months in their local real estate markets.

National Overview: Summary Indices

The national composite index of survey results slipped to 60 in January down from 64 recorded during the previous two surveys. The January results were still a favorable reading, indicating that more respondents reported gains than declines in their local markets. However, the summary figure was the lowest in more than three years.

The January decline was attributable primarily to weaker assessments of housing market conditions; the composite index for that sector dropped to 57 from 63 in October. In contrast, assessments of commercial real estate conditions changed only slightly since the previous survey, with the composite index for that sector at 63 in January as opposed to 65 in October.

Real estate market change over the three months ending in January 1996

These composite indices and those 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.

Changing assessments of real estate conditions

Housing Markets Are Less Robust

Assessments of overall trends in residential real estate were decidedly less upbeat in the January survey. The proportion of respondents saying housing markets were on the upswing during recent months slipped to 28 percent in January from 37 percent in October. This was the lowest proportion to report improvements in their local housing markets since the inception of the survey in April 1991.

The weaker readings seem to signal a stalling of the recovery in housing markets rather than a downturn. With only 15 percent saying conditions were weaker during the past three months, positive assessments still outweigh negative ones by a margin of almost 2-to-1. Consistent with this assessment was the fact that excess supply in local housing markets reportedly remained in a much-improved range the 30 percent who noted oversupply was much lower than the 65 percent reading of four years ago.

Assessments of home sales and existing home prices were lackluster, suggesting the recent declines in mortgage costs have not yet had a beneficial effect on housing activity --- or the effect has been delayed. Only 20 percent of the respondents cited improving home sales; in the October survey this proportion was 30 percent. Likewise, fewer respondents in January (36 percent) noted that existing home prices increased in their local markets. The exception was a significant increase in reports of price gains in the West.

Percent of respondents reporting improving home sales

Conversely, new construction activity reportedly remained strong late last year and early in 1996. Almost 80 percent of the respondents viewed homebuilding as at average or above-average levels during the past three months. Assessments of rental apartment construction remained in a much-improved range, with almost 60 percent of the respondents again observing average or above-average construction levels.

Percent of respondents reporting increasing residential real estate prices

Percent of respondents reporting average of above-average new home construction

Positive Reports on Commercial
Real Estate Markets Continue

Survey respondents continued to report a fairly widespread recovery in commercial real estate. As in October, most respondents (63 percent) believed that commercial markets were essentially unchanged. However, one-third reported gains. Evaluations of deteriorating conditions were still infrequent, rising from 2 percent in the October survey to 5 percent in January.

Percent of respondents reporting commercial real estate markets were...

Percent of respondents reporting average or above-average sales of commercial properties

Examiners and asset managers continued to report improvements in many aspects of commercial markets in January. Reports of increasing demand for office space (24 percent) outweighed reports of declining demand (9 percent). Furthermore, the recovery in commercial real estate sales reportedly is still strengthening. The proportion of respondents reporting average or above-average sales of commercial real estate edged up to 70 percent from 69 percent three months ago. Reports of improving sales were most pronounced in the West.

Percent of respondents reporting excess supply in real estate markets

The ongoing recovery in commercial real estate markets has made serious inroads in reducing overhangs of floorspace left over from previous building booms. Reports of excess supply have been decreasing steadily for three years, but reductions have been particularly sharp during the past year. The 38 percent figure in January was down from 41 percent in October and from 52 percent a year earlier. Also noteworthy was the increasing frequency of reports characterizing local markets as "in balance." A record number of market observers in the Northeast and the South stated this view.

Changing assessments of real estate conditions in the south

Regional Trends

Examiners and asset managers were less positive about recent developments in all regions in January. However, respondents in the Northeast and the West were the least likely to have noted gains in their local real estate markets, as indicated by their respective regional composite index of 54 and 55. The relatively low readings were attributed to weaker assessments of residential markets in both regions. In the West, reports of better conditions in commercial real estate markets increased sharply in January. That gain reflected the increasing characterization of markets as in balance (up to 35 percent from 30 percent a year earlier), as well as reports of above-average commercial sales and below-average vacancy rates.

Percent of respondents reporting improved commercial real estate market conditions

Reports of improving real estate markets during the October-January period were again most prevalent in the South, with a regional index of 63. In fact, reports from the South have consistently been the most positive of any region since the survey began. In part, the reported gains reflect the serious problems some key markets in the South experienced during the past decade. For instance, major declines in office vacancy rates of five percentage points or more were experienced in major Texas markets during the past five years. Yet, vacancy rates in markets such as Dallas and Houston still far exceed the national average. Likewise, the composite gain in residential construction in most states in the South has exceeded the national average since 1991, after falling more sharply than in other regions in the 1980s.

In January, the South led all regions in the highest proportion of respondents observing improved commercial and residential real estate market conditions 38 percent and 33 percent, respectively. Most of the reports citing improvements in local commercial real estate markets came from respondents in Alabama, Kentucky and Mississippi (in East South Central) and in Oklahoma and Texas (in West South Central), while reports of residential market gains were quite frequent in Florida and Texas.

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 333 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 were included.

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


APPENDIX

SUMMARY INDICES OF REAL ESTATE TRENDS

  Composite Commercial Residential
U.S. 60 63 57
Northeast 54 55 52
South 63 66 61
Midwest 62 66 59
West 55 62 50
Improving market: Index Value > 50
Declining market: Index Value > 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 (72), South (112), Midwest (93) and West (56). 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

OVERVIEW

**REAL ESTATE TRENDS**

COMMERCIAL MARKETS

"What would you say is the general direction of the commercial market now compared with three months ago?"
A Lot Better
A Little Better
Same
A Little Worse
A Lot Worse
Not
Sure
Index*
All 2% 30% 63% 5% 0% 0% 63
Northeast 0% 16% 78% 6% 0% 0% 55
South 5% 33% 57% 6% 0% 0% 66
Midwest 0% 32% 67% 1% 0% 0% 66
West 0% 35% 54% 11% 0% 0% 62

RESIDENTIAL MARKETS
"What would you say is the general direction of the residential market now compared with three months ago?"
A Lot Better
A Little Better
Same
A Little Worse
A Lot Worse
Not
Sure
Index*
All 1% 27% 58% 15% 0% 0% 57
Northeast 1% 23% 56% 20% 0% 0% 52
South 2% 31% 57% 10% 0% 0% 61
Midwest 1% 28% 60% 11% 0% 0% 59
West 0% 22% 56% 22% 0% 0% 50


**CURRENT REAL ESTATE CONDITIONS**
COMMERCIAL MARKETS
"In general, how would you characterize the commercial real estate market?"
Tight Supply
Supply and Demand
Roughly in Balance
Excess Supply
Not Sure
All 8% 55% 38% 0%
Northeast 5% 39% 57% 0%
South 7% 62% 31% 0%
Midwest 10% 69% 21% 0%
West 9% 35% 56% 0%
RESIDENTIAL MARKETS
"In general, how would you characterize the residential real estate market?"
Tight Supply
Supply and Demand
Roughly in Balance
Excess Supply
Not Sure
All 7% 64% 30% 0%
Northeast 0% 43% 57% 0%
South 5% 80% 16% 0%
Midwest 11% 73% 16% 0%
West 11% 44% 46% 0%


**KEY MARKET INDICATORS**
RESIDENTIAL
"How would you characterize the current volume of home sales?"
Much Higher than Average
Somewhat Above Average
About Average
Somewhat Below Average
Much Below Average
Not
Sure
All 0% 20% 54% 24% 1% 1%
Northeast 0% 6% 57% 36% 1% 0%
South 0% 25% 58% 16% 0% 2%
Midwest 1% 26% 59% 13% 0% 1%
West 0% 22% 35% 42% 2% 0%


"How would you characterize sales prices of existing homes?"
Increasing Rapidly
Increasing Moderately
Holding Steady
Decreasing Moderately
Decreasing Rapidly
Not
Sure
All 0% 36% 52% 11% 0% 1%
Northeast 0% 19% 70% 11% 0% 0%
South 0% 36% 54% 9% 0% 1%
Midwest 0% 58% 37% 4% 0% 1%
West 2% 24% 49% 26% 0% 0%

"How would you characterize the current volume of new home construction?"
Much Higher than Average
Somewhat Above Average
About Average
Somewhat Below Average
Much Below Average
Not
Sure
All 3% 26% 48% 19% 4% 1%
Northeast 1% 6% 51% 31% 10% 0%
South 3% 36% 49% 13% 0% 0%
Midwest 3% 31% 56% 9% 0% 1%
West 2% 24% 29% 31% 13% 2%

"How would you characterize the current volume of rental apartment construction?"
Much Higher than Average
Somewhat Above Average
About Average
Somewhat Below Average
Much Below Average
Not
Sure
All 3% 19% 37% 30% 19% 2%
Northeast 0% 3% 21% 51% 23% 1%
South 6% 30% 42% 17% 1% 4%
Midwest 2% 20% 47% 23% 6% 2%
West 2% 15% 29% 40% 15% 0%


**KEY MARKET INDICATORS**
COMMERCIAL
"How would you characterize vacancy rates in commercial real estate?"
Much Higher than Average
Somewhat Above Average
About Average
Somewhat Below Average
Much Below Average
Not
Sure
All 2% 28% 49% 19% 1% 1%
Northeast 3% 46% 40% 10% 0% 0%
South 2% 20% 58% 16% 1% 3%
Midwest 0% 13% 54% 30% 2% 0%
West 4% 44% 30% 20% 2% 0%


"How would you characterize the volume of sales of commercial real estate properties?"
Much Higher than Average
Somewhat Above Average
About Average
Somewhat Below Average
Much Below Average
Not
Sure
All 1% 13% 56% 24% 3% 3%
Northeast 0% 3% 51% 36% 8% 3%
South 2% 15% 59% 19% 0% 5%
Midwest 0% 18% 67% 11% 1% 3%
West 0% 15% 41% 39% 6% 0%


"How would you characterize commercial real estate sales prices?"
Increasing Rapidly
Increasing Moderately
Holding Steady
Decreasing Moderately
Decreasing Rapidly
Not
Sure
All 0% 27% 64% 8% 0% 1%
Northeast 0% 12% 76% 10% 2% 0%
South 0% 30% 67% 3% 0% 1%
Midwest 0% 38% 54% 6% 0% 2%
West 0% 22% 59% 17% 0% 2%

"How common are rent concessions now compared with three months ago?"
Much More Frequently
Somewhat More Frequently
About the Same
Somewhat Less Frequently
Much Less Frequently
Not
Sure
All 0% 6% 62% 25% 3% 4%
Northeast 2% 9% 66% 19% 0% 5%
South 0% 3% 60% 30% 4% 4%
Midwest 0% 6% 62% 22% 3% 7%
West 0% 7% 63% 24% 4% 2%


"How would you characterize the demand for new office space in your area now compared with three months ago?"
Much Higher
Somewhat Higher
About the Same
Somewhat Lower
Much Lower
Not
Sure
All 1% 23% 67% 8% 1% 1%
Northeast 0% 9% 75% 10% 5% 2%
South 2% 29% 61% 7% 0% 1%
Midwest 0% 27% 69% 4% 0% 0%
West 0% 22% 65% 13% 0% 0%

* See above "Summary Indices of Real Estate Trends" for an explanation of the Index. NOTE: Percentages are calculated by dividing the number of responses in each category within each region by that region's total number of respondents. Numbers may not sum to 100 due to rounding error.

Last Updated 7/29/1999 insurance-research@fdic.gov

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