Real estate recovery slows down as market for housing weakens.

WASHINGTON -- Weakening housing markets over the past three months contributed to an overall slowdown in the real estate market's comeback, the Federal Deposit Insurance Corp. said Tuesday.

The FDIC's latest survey of examiners and liquidators found that the proportion of respondents who reported improving conditions in local housing markets was the lowest in two years. However, the glut of commercial real estate property on the market continued to shrink.

The FDIC examines real estate conditions every three months by polling about 450 market experts from federal bank and thrift regulatory agencies. A composite score is then compiled that reflects both housing and commercial markets throughout the country.

In a continuing decline from the record of 78 in April, the national composite score dropped from 72 in July to 67.

"We can trace the less-positive October results directly to weaker housing markets," said Ricki R. Tigert, FDIC chairman. "Our most recent opinion survey picked up new indications that higher mortgage interest rates are adversely affecting potential homebuyers and, ultimately, home sales and construction."

The residential index dropped seven points to 64 over the past three months, while commercial real estate held relatively stable, dropping only one point to 71.

An index value over 50 indicates that more bank examiners and asset managers saw an upswing in conditions rather than a downturn. The higher the figure is above 50, the more examiners agree about the state of the market.

Commercial real estate continued to climb out of the slump caused by the credit crunch in the late 1980s. Fifty-nine percent of respondents said that there was excess supply in their local markets -- the lowest proportion in the survey's history. Only 9% said that commercial real estate prices were still falling.

"Considering the depth of the problems that have plagued commercial real estate markets, the continued strong survey results are very encouraging," Ms. Tigert said. "The decline in the excess inventory is especially positive news." In contrast, 13% of survey respondents noted declines in the residential housing market, nearly double the number who saw a weaker market in July.

Although the ratio of respondents reporting excess supply in the housing market increased for the first time in two years, the recovery in housing is "much further along" than in the commercial real estate market.

In the regional breakdown, the South was still reporting the most strength in the overall real estate market. Although the composite index for this region dropped from 79 in July to 72 in October, it is nonetheless six points higher than the next-best regions, the Midwest and the Northeast, which both had composite indexes of 66.

The drooping southern residential market -- the index was 67, the lowest to date -- was primarily responsible for the drop in the region's composite index.

Respondents in the West reported the worst news for commercial real estate of all the regions, primarily because of the market in California. Only 13% of those queried in that state reported gains in the commercial real estate market.

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