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Survey of Real Estate Trends

October, 1995


Highlights

  • The national composite index, summarizing responses to the FDIC's Survey of Real Estate Trends, was 64 in October -- continuing gains noted in the July survey from the more moderate reading of 61 posted in the spring.
  • The ongoing recovery in commercial real estate was sustained in many areas of the country, with the level of participants reporting better conditions (33 percent) far outweighing the 2 percent who observed deterioration.
  • Residential markets continued to strengthen, according to 37 percent of survey participants, and the proportion of respondents noting worsening conditions remained at only 12 percent. Reports of improving apartment construction activity set a new survey record.
  • The real estate recovery broadened geographically, as solid gains were observed in both commercial markets in the Northeast and residential markets in the West for the first time in six quarters.

Introduction

Federal bank and thrift regulatory experts responding to the FDIC's Survey of Real Estate Trends in October continued to be positive about trends in their local real estate markets. The results indicated housing markets were continuing to recoup from weakness observed earlier in the year, while the recoveryin commercial real estate markets broadened geographically. Although overall reports of gains in either market were not as numerous as in the July survey, the proportion of respondents noting declines was at the lowest level in a year. Of note were the improvements reported in the comparatively weaker regions of the Northeast and the West, where participants observed solid gains in the commercial and residential markets, respectively.

Survey Summary: Composite Indices

The national composite index of survey results in October held steady at the positive reading of 64 recorded in July. The repeat reading represented the continuation of solid improvements in real estate markets across the country following the recent low reading of 61 posted in April.


Real estate market changes over the three months ending in October 1995, Summary indices of opinions


Changing assessments of real estae conditions, Summary of indices of opinions


October's summary index for commercial markets repeated the July reading of 65. In contrast, the national residential index edged down slightly to 63 from 64 in July; nonetheless, housing markets are maintaining gains made in July from weakening recovery noted late last year and earlier this year.

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.

Continued Improvements in Commercial Markets

Most respondents who reported change in their local commercial real estate markets in October continued to characterize trends as positive, although the proportion of respondents noting improvement continues to fall. Nonetheless, one-third of survey participants felt conditions were better in October than three months earlier. Moreover, only 2 percent observed deterioration in their local markets. The Northeast was the only region where reports of improving commercial trends increased, from 11 percent in July to 23 percent in October.


Percent of respondents reporting commercial real estate, Market were...


Reports of excess supply in commercial real estate markets have halved in just two years, falling to a new survey low of 41 percent in October. Moreover, for the first time since the survey began four and one-half years ago, a majority of the respondents (53 percent) characterized supply and demand in their local commercial real estate markets as "in balance." This response was elicited from a much higher proportion of participants in the Midwest (71 percent) than in any other region.


Percent of respondents reporting excess supply in commercial real estate markets


Reports of recovery in commercial real estate prices are continuing, with over one-quarter of the respondents noting increasing sales prices in the August-October period. Positive reports were concentrated in the Midwest region, particularly in Michigan and Minnesota. However, nearly two-thirds of all respondents still note stable commercial property prices in their local markets. The ongoing recovery in commercial real estate markets was further evidenced by observations of both rent concessions and decreasing demand for office space that were the lowest in over a year.


Percent of respondents reporting increasing sales prices of commercial properties


Residential Markets Maintain Gains

Most facets of housing markets are improved from reports earlier in the year that indicated the ongoing recovery to be weakening. The results of the October survey indicated that housing market improvements cited in the July survey continued into the early fall. Thirty-seven percent of the October respondents reported gains in their local housing markets; only 12 percent reported deterioration.


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


At the same time, three-quarters of the observers reported home-building at average or above-average levels. In addition, assessments of the long-depressed apartment market are showing further signs of improvement. The 61 percent of respondents noting average or above-average levels of activity in apartment and condo construction was the highest since the survey's inception.

Existing home markets also have been firming, according to the October survey. Above-average sales were reported in 30 percent of the markets, while another 48 percent observed average levels. Taken together, reports of residential sales at these levels were the highest in a year. In fact, 90 percent or more of the respondents reported home sales at average or above-average levels in the South and the Midwest.


Percent of respondents in October reporting existing home sales were...


Increasing existing home resale prices were observed again in October by 40 percent of the respondents, following on the heels of solid improvement in July. Further, only 13 percent reported declines in resale prices, virtually unchanged from July's reading. When the survey commenced in April 1991, more than 30 percent observed falling housing values.


Percent of respondents reporting increasing residential real estate prices


Regional Trends

Of note in the results of the October survey was turnarounds in both the Northeast and the West, where comparatively weaker market conditions were observed in recent surveys. For the first time in six quarters, participants reported improvements both in the Northeast's commercial markets (the composite commercial index rose to 58 in October from 53 in July) and in the housing markets in the West (the average residential reading was 53, up from 48). Although still bordering on the low side, these readings represent solid gains for both regions.

As has been the case for some time, reports cited many real estate markets in the West outside of California as among the most robust in the nation. Evaluations of residential and commercial conditions in Western markets outside of California illustrated that point. In the October survey, 38 percent of the respondents said their local commercial real estate markets had strengthened during the past three months; 41 percent reported stronger housing markets. Those positive readings would be reduced by almost one-third if reports from California were included.


Percent of respondents reporting improved real estate markets


Nevertheless, slightly more-positive reports came out of California in October for both commercial and residential real estate -- a reversal of recent readings. Most observers in October noted stable conditions in both commercial and housing markets (81 percent and 63 percent, respectively). Those respondents reporting changing conditions cited the greatest improvements in California commercial markets. Fourteen percent of survey participants observed gains in commercial real estate versus 5 percent reporting declines. On the other hand, the comparable assessments for California housing markets were 14 percent and 23 percent.


Percent of respondents reporting better conditions in California real estate markets


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 365 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. Experienced asset managers and managing agents from the Resolution Trust Corporation also were polled.

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 Charlotte Balton 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. 64 65 63
Northeast 61 58 53
South 68 70 67
Midwest 67 69 65
West 56 60 53
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 (74), South (123), Midwest (96) and West (72). 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% 31% 65% 2% 0% 0% 65
Northeast 2% 21% 72% 6% 0% 0% 58
South 3% 36% 60% 0% 0% 1% 70
Midwest 0% 38% 61% 1% 0% 0% 69
West 2% 22% 74% 3% 0% 0% 60



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 2% 31% 65% 2% 0% 0% 65
Northeast 2% 21% 72% 6% 0% 0% 58
South 3% 36% 60% 0% 0% 1% 70
Midwest 0% 38% 61% 1% 0% 0% 69
West 2% 22% 74% 3% 0% 0% 60

**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 6% 53% 41% 0%
Northeast 3% 34% 63% 0%
South 4% 60% 35% 0%
Midwest 7% 71% 21% 0%
West 7% 32% 60% 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 8% 63% 29% 0%
Northeast 1% 43% 56% 0%
South 8% 76% 15% 0%
Midwest 15% 75% 11% 0%
West 6% 44% 50% 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 1% 29% 48% 21% 1% 1%
Northeast 0% 6% 57% 36% 1% 0%
South 3% 35% 52% 9% 0% 1%
Midwest 1% 38% 54% 5% 0% 1%
West 0% 31% 22% 44% 3% 0%

"How would you characterize sales prices of existing homes?"
Increasing Rapidly
Increasing Moderately
Holding Steady
Decreasing Moderately
Decreasing Rapidly
Not
Sure
All 1% 39% 47% 12% 1% 1%
Northeast 0% 25% 56% 17% 1% 1%
South 1% 44% 48% 7% 0% 1%
Midwest 1% 56% 42% 1% 0% 0%
West 1% 24% 44% 29% 1% 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 4% 29% 43% 20% 30% 1%
Northeast 0% 6% 50% 38% 6% 1%
South 6% 37% 48% 7% 0% 2%
Midwest 4% 43% 42% 11% 0% 1%
West 3% 22% 29% 38% 8% 0%

"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 4% 22% 35% 27% 10% 2%
Northeast 0% 3% 29% 44% 22% 1%
South 6% 36% 31% 15% 1% 3%
Midwest 2% 22% 40% 26% 6% 3%
West 7% 18% 26% 33% 15% 0%

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 4% 30% 46% 19% 0% 1%
Northeast 3% 48% 37% 12% 0% 0%
South 2% 27% 52% 16% 0% 3%
Midwest 1% 13% 59% 28% 0% 0%
West 10% 44% 27% 19% 0% 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% 15% 53% 24% 2% 5%
Northeast 0% 3% 55% 36% 5% 2%
South 3% 22% 53% 16% 1% 5%
Midwest 0% 17% 65% 11% 0% 7%
West 2% 10% 34% 46% 6% 3%

"How would you characterize commercial real estate sales prices?"
Increasing Rapidly
Increasing Moderately
Holding Steady
Decreasing Moderately
Decreasing Rapidly
Not
Sure
All 0% 28% 61% 8% 0% 3%
Northeast 0% 12% 72% 13% 2% 2%
South 0% 31% 62% 3% 0% 4%
Midwest 0% 39% 54% 3% 0% 3%
West 2% 21% 60% 18% 0% 0%

"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 1% 3% 63% 26% 3% 5%
Northeast 3% 3% 61% 27% 2% 5%
South 0% 2% 60% 28% 5% 6%
Midwest 0% 2% 63% 29% 1% 5%
West 0% 6% 71% 21% 2% 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 0% 24% 68% 6% 1% 1%
Northeast 0% 13% 66% 16% 5% 0%
South 0% 28% 66% 3% 0% 2%
Midwest 0% 29% 68% 2% 0% 1%
West 0% 22% 71% 7% 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 8/12/1999 insurance-research@fdic.gov