Housing slump slows real estate recovery; higher rates blamed.

WASHINGTON -- A slow-down in the housing market over the past three months has slowed the real estate market's recovery, the Federal Deposit Insurance Corp. said Tuesday.

"The vigorous rebound in housing has slowed somewhat nationwide in recent months," the FDIC's latest survey of examiners and liquidators found. However, commercial real estate continued to gather steam.

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

The national composite score slipped from the record 78 in April to 72.

The drop was attributed mainly to weaker assessments of housing market conditions; the residential index tumbled 11 points to 71 over the past three months. In contrast, the commercial real estate market continued to hold firm, ebbing only one point to 72.

Any index value over 50 indicates that more bank examiners and asset managers thought conditions were improving rather than declining. The higher the index is above 50, the more examiners agree about recent market developments.

FDIC researchers blamed rising interest rates for the housing market's downturn.

"While a strong housing recovery is still reported by our experts in the field, the pace of the recovery slowed, most likely due to the dampening effect of rising interest rates," said James L. Freund, the FDIC researcher in charge of the agency's survey.

Seven percent of respondents saw worsening conditions in residential real estate markets. That's more than double the number who saw weaker housing markets in the last survey, the FDIC said.

Only 40% of respondents reported home sales as above average, compared with 51% three months ago.

Although over 64% of survey participants agreed that their local markets were still oversupplied with commercial properties, this figure is a vast improvement over the 83% of respondents who saw a surplus in office and retail space one year ago, Mr. Freund said.

Yet the market still has "a long way to go before the excess supply of commercial building space is cleared out," he said.

On a regional basis, the recovery of real estate markets from the downturn of the late 1980s continues to be most prevalent in the South, where the index was 79. This figure is down from 83 in April, but it is six points higher than the next-best region.

"Respondents in the South were most positive in the nation with respect to commercial property prices and increasing demand for office space," the survey noted.

The Northeast took second place in the regional market ratings with an index of. 73, down from 79 in April. Despite the relatively high rating, assessments of market conditions in this region were "the weakest in the nation," according to the report, with over 80% of those surveyed reporting a surplus of commercial properties. Half the respondents noted an oversupply of residential units in the region.

The composite. score in the Midwest took the biggest beating, falling nine points to 68. Still, the FDIC concluded that "reports of excess supply in the Midwest in July were clearly the lowest of any region in the country for both housing and commercial properties."

The West's composite score fell to 65 from 71 in April. The California real estate market held its ground over the last three months, with most respondents noting stable conditions in both the residential and commercial markets, according to the FDIC. The rest of the West reported improving commercial real estate market conditions.

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