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Survey of Real Estate Trends

April 1996


Highlights

  • The national composite index, summarizing responses to the Survey of Real Estate Trends, jumped to 67 in April from 60 in January. Reports of gains were widespread across the country.
  • The strong April reading largely was driven by gains in residential real estate, with 45 percent of survey participants citing better conditions versus only nine percent seeing worsening conditions.
  • On balance, respondents are still quite positive about trends in commercial real estate. The 35 percent noting improving conditions was the highest proportion in a year.
  • Reports of improving conditions were relatively frequent in markets in both the West and the South. Of particular note were the upbeat reports from respondents in California -- the proportion citing an upswing in both housing and commercial markets was at the highest level to date.


Introduction

Respondents in the FDIC's April Survey of Real Estate Trends reported solid improvements in local real estate markets across the country. The overall results were the most positive received since the October 1994 survey, with widespread gains reported for both residential and commercial real estate. Of particular note was the increasing frequency of reports of improvements in California's real estate markets. The proportion of participants reporting recovery there was at its highest level of any survey to date.

Four times a year the FDIC asks senior examiners and asset managers from all federal bank and thrift regulatory agencies about developments during the prior three months in their local real estate markets. The April 1996 survey marks the fifth anniversary of the FDIC's poll.

National Overview: Summary Indices

The national composite index jumped sharply to 67 in April from 60 in January, indicating that the scope of the real estate recovery broadened considerably in early 1996. The April gain was the first sizable increase in more than two years.

The news was particularly positive regarding housing market trends. Forty-five percent of the respondents reported improvements in residential real estate during the past three months -- up from 28 percent in the January survey. A relatively low 9 percent observed worsening conditions, and the remainder reported "no change." As a result, the summary index for residential real estate rose more than 10 points to 68. The average reading for the prior six survey periods was 60.

Real estate market changes over the three months ending in April 1996


Changing Assessments of real estate conditions

The proportion of survey participants reporting gains in their local commercial real estate market also was higher in April than in recent reports. Nationwide, 35 percent said conditions had strengthened during the February-April period, while the number citing weaker conditions fell to 3 percent. These readings yielded a composite commercial index of 66, the highest in a year.

The composite 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.

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

Widespread Gains Reported in Housing Markets

The results of the April survey suggest considerable strengthening recently in housing markets. Reports of improvement far outweighed weakening in all regions of the country; the highest proportion of positive assessments (54 percent) came from respondents in the West. The marked increase in reports of improving conditions during the three months ending in April follows several periods of progressively less positive assessments about residential real estate.

The good news about housing markets also was reflected in the answers to more detailed questions. The 27 percent of respondents in April noting an excess supply of residential real estate matched the survey low previously set in July 1994. Moreover, only 13 percent said their local housing markets were marked by tight supply. Consistent with this continuing improvement, almost 80 percent of respondents reported homebuilding at average or above-average levels. The 20 percent citing below-average activity was the lowest in two years. Respondents also were upbeat when asked about apartment construction. The 66 percent noting average or above-average rental construction activity was the highest level of any survey to date.

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

Home sales activity also fared well, according to survey participants. A third noted above-average sales volume in local housing markets during the February-April period -- a sharp increase from the 19 percent cited a year ago. At the same time, the 15 percent observing below-average sales levels matched the lowest proportion previously reported.

Nationally, reports of increasing home resale prices far outnumbered reports of price declines. Resale prices were particularly strong in the Midwest, where 60 percent of respondents noted increases. In addition, reports of increasing prices in both the South and the West were much more frequent in April than in the previous survey. At the other end of the spectrum, 16 percent of respondents in the Northeast observed decreasing resale prices -- up somewhat from the January survey. However, reports of weakening prices in California were far fewer in April than three months earlier.

Improvements Continue in Commercial Markets

The survey has reported that commercial real estate markets across the country have been on the upswing for four years. In April, overall assessments of commercial real estate market trends were more positive than the past few reports, with the most marked improvement observed in the West.

Percent of respondents reporting changing sale prices of existing homes

Respondents across the nation observed continued progress in working down excess inventories of commercial real estate across the country. The 35 percent citing excess supply of commercial real estate was down from 53 percent a year ago. Of note was the jump to 13 percent of reports from the West of "tight" supply in commercial markets. The majority of such reports came from market observers in Utah and Washington.

Percent of respondents reporting excess supply in real estate markets

In addition to seeing a growing number of markets reduce excess supply, April respondents were encouraging in their evaluations of commercial property transactions. The proportion citing average or above-average sales continued to increase, rising to nearly three-fourths. Furthermore, one-third of survey participants reported that commercial real estate prices were on the rise, up from one-quarter two years ago and from below 10 percent when the survey was initiated in April 1991. The frequency of reports of increasing prices rose by a wide margin in the West outside of California. In California, reports of declining commercial real estate prices still outnumbered gains by one-half.

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

Regional Trends

The widespread gains reported in the April survey were encouraging. Reports were least positive in the Northeast with a regional index value of only 56. While the majority of respondents in the Northeast saw no change in real estate markets, almost 10 percent reported weakening trends in commercial real estate -- the highest proportion in over two years. Such reports were concentrated in Connecticut and New York.

Percent of respondents reporting increasing commercial real estate prices


Percent of respondents reporting better conditions in California real estate markets

As has been the case throughout the five-year history of the survey, respondents in the South were the most positive (index value of 71). The big jump in April took place in the West, where assessments were much improved from the prior survey. Improved readings of both residential and commercial real estate markets pushed the regional composite index in the West to a near-high of 70. Reports of residential markets were the most positive in two years, with 54 percent of the respondents noting better housing markets. On the commercial side, 42 percent saw strengthening while only 2 percent cited weaker conditions.

Percent of respondents reporting above-average home sales in California

Of note in the results of the April survey was the turnaround in California. Following persistent negative reports in previous surveys, most observers in California noted upswings in both residential and commercial real estate markets during the February-April period. Of those respondents noting change in housing conditions, almost one-half cited gains. The figure just three months earlier had been only 24 percent. A key component in the gains cited was the 20 percentage point increase in reports of above-average home sales. The rise in positive assessments of commercial markets was not as dramatic; nonetheless, 37 percent of California real estate specialists noted gains in April, up from 25 percent in the prior survey.

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 326 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. 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 the fact that the survey included a large number of RTC asset managers. That agency was terminated at year-end 1995.

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 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.              67               66                  68
 Northeast         56               54                  58
 South             71               70                  71
 Midwest           68               67                  68
 West              70               70                  71
 
 
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 (65), South (112), Midwest (87) and West (62). 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   A Little        A Little  A Lot   Not
           Better   Better   Same   Worse    Worse   Sure  INDEX*
All          3%       32%     62%     3%       -      1%     66
 Northeast   -        17%     75%     9%       -      -      54
 South       4%       39%     56%     2%       -      -      70
 Midwest     2%       31%     64%     -        -      2%     67
 West        7%       35%     57%     2%       -      -      70
 

RESIDENTIAL MARKETS

"What would you say is the general direction of the residential market now compared with three months ago?"

           A Lot   A Little        A Little  A Lot    Not
           Better   Better   Same   Worse    Worse   Sure  INDEX*
All          3%       42%     46%     9%       -      1%     68
 Northeast   2%       28%     56%    14%       -      -      58
 South       3%       46%     45%     6%       -      -      71
 Midwest     -        44%     46%     8%       -      2%     68
 West        7%       47%     35%    12%       -      -      71

**CURRENT REAL ESTATE CONDITIONS**

  COMMERCIAL MARKETS

"In general, how would you characterize the commercial real estate market?"


                        Supply and Demand
                Tight       Roughly in        Excess       Not
                Supply       Balance          Supply       Sure
All               8%           56%              35%          -
 Northeast        3%           32%              64%          -
 South            7%           68%              23%          -
 Midwest         10%           69%              21%          -
 West            13%           38%              45%          -

RESIDENTIAL MARKETS

"In general, how would you characterize the residential real estate market?"


                                 Supply and Demand
                Tight       Roughly in        Excess       Not
                Supply       Balance          Supply       Sure
All              13%           60%              27%          -
 Northeast        8%           42%              50%          -
 South            7%           74%              18%          -
 Midwest         19%           68%              12%          -
 West            18%           40%              40%          -

**KEY MARKET INDICATORS**

RESIDENTIAL

"How would you characterize the current volume of home sales?"

  
          Much      Somewhat            Somewhat     Much
         Higher      Above      About     Below     Below     Not
       Than Average  Average   Average   Average   Average   Sure
All          2%        31%       52%       14%       1%       1%
 Northeast   -          8%       56%       33%       3%       -
 South       3%        33%       58%        5%       -        1%
 Midwest     2%        40%       52%        5%       -        1%
 West        3%        38%       35%       23%       -        -
"How would you characterize sales prices of existing homes?"
  
     Increasing  Increasing  Holding  Decreasing  Decreasing  Not
       Rapidly    Moderately  Steady   Moderately  Rapidly   Sure
All         3%       40%        49%        8%         -        1%
 Northeast  -        25%        59%       16%         -        -
 South      2%       42%        50%        5%         -        1%
 Midwest    2%       58%        37%        2%         -        1%
 West       7%       27%        55%       12%         -        -
 
"How would you characterize the current volume of new home construction?"

          Much      Somewhat            Somewhat     Much
         Higher      Above      About     Below     Below     Not
       Than Average  Average   Average   Average   Average   Sure
All          4%        34%       40%       17%        3%      1% 
 Northeast   2%        16%       39%       36%        8%      -
 South       7%        41%       41%       10%        -       1%
 Midwest     4%        45%       39%       11%        -       2%
 West        3%        27%       42%       20%        8%      - 
"How would you characterize the current volume of rental apartment construction?"

          Much      Somewhat            Somewhat     Much
         Higher      Above      About     Below     Below     Not
       Than Average  Average   Average   Average   Average   Sure
All          6%        23%       37%       20%        8%      5%
 Northeast   -          -        25%       45%       23%      6%
 South       9%        41%       34%       10%        1%      5%
 Midwest     6%        25%       45%       13%        6%      6%
 West        7%        13%       45%       23%        8%      3%

**KEY MARKET INDICATORS**

COMMERCIAL

"How would you characterize vacancy rates in commercial real estate?"


          Much      Somewhat            Somewhat     Much
         Higher      Above      About     Below     Below     Not
       Than Average  Average   Average   Average   Average   Sure
All         2%         22%       51%       21%        2%      2%
 Northeast  7%         42%       37%       10%        -       3%
 South      1%         18%       58%       19%        2%      3%
 Midwest    -           5%       66%       24%        4%      1%
 West       2%         35%       32%       30%        2%      -
"How would you characterize the volume of sales of commercial real estate properties?"

          Much      Somewhat            Somewhat     Much
         Higher      Above      About     Below     Below     Not
       Than Average  Average   Average   Average   Average   Sure
All         1%         18%       54%       21%        2%      4%
 Northeast  -           3%       63%       24%        9%      2%
 South      1%         23%       54%       19%        -       4%  
 Midwest    1%         19%       59%       12%        -       8%
 West       -          23%       40%       33%        2%      2%
"How would you characterize commercial real estate sales prices?"
 
     Increasing  Increasing  Holding  Decreasing  Decreasing  Not
       Rapidly    Moderately  Steady   Moderately  Rapidly   Sure
All         0%       33%        60%        5%         0%       2%
 Northeast  -        19%        70%       10%         2%       -
 South      -        33%        62%        3%         -        2%
 Midwest    -        43%        53%        -          -        4%
 West       2%       33%        55%       10%         -        - 
"How common are rent concessions now compared with three months ago?"

         Much     Somewhat    About   Somewhat     Much
         More       More       The     Less        Less     Not
      Frequently  Frequently  Same  Frequently  Frequently  Sure
All         -         3%       64%      24%         4%       6%
 Northeast  -         5%       78%      15%         -        2% 
 South      -         3%       60%      28%         4%       6%
 Midwest    -         -        60%      25%         5%      10%
 West       -         5%       60%      22%         7%       7%
"How would you characterize the demand for new office space in your area now compared with three months ago?"

          Much     Somewhat     About   Somewhat    Much    Not
         Higher     Higher    The Same    Lower     Lower   Sure
All         1%       24%         65%        7%        1%     2%
 Northeast  -        12%         70%       15%        3%     - 
 South      1%       29%         66%        4%        -      1%
 Midwest    1%       25%         64%        4%        -      6%
 West       2%       27%         60%       10%        -      2%
 

* 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