Real estate markets worldwide are stabilizing and showing signs of a tentative recovery, according to a newly released report from London based global property consultancy Knight Frank.

The quarterly Knight Frank Global House Price Index shows property values increasing in almost half of 32 countries surveyed during the second quarter of this year. “Significantly, quarterly price falls accelerated in only 22% of the locations and did not exceed 10% in any country,” says Liam Bailey, head of residential research for Knight Frank. “This compares with double digit falls in a number of locations during the first quarter.”

Some of the strongest signs of recovery are coming from the Nordic countries, with prices up over the previous quarter by 5.3% in Norway, 3.9% in Finland, and 3.6% in Sweden. But countries as diverse as Australia, Israel, and the Netherlands also are posting solid gains.

In some places, demand is being spurred by historically low borrowing costs and home buyer tax incentives. Sweden’s central bank, for example, has slashed the prime interest rate from 3.75% a year ago to only 0.25% today, so banks there are now offering home loans at interest rates as low as 1.5%.

Interest rate reductions by the Bank of England, coupled with a relatively tight supply of housing in Britain, has reignited the market there as well, sending prices up 1.1% in the second quarter after five consecutive quarters of price drops.

Housing Market Is Still Fragile

The market is even starting to rebound in the U.S., where the subprime mortgage crisis originally began. U.S. home prices rose 1.3% in the second quarter, following declines of 7% in each of the previous two quarters. Even hard hit regions such as California are starting to recover.

But worries still linger. Credit remains constrained as the global economy struggles to recover, and many countries still have an excess supply of unsold property, putting downward pressure on prices. Despite the positive signs in the second quarter, prices in most countries remain lower than a year ago, and Knight Frank says the market is still fragile.

What’s more, super low interest rates won’t last forever. “One could even say that house prices are now artificially boosted by low mortgage rates,” says Magnus Lange, a partner in the Stockholm office of real estate brokerage Cushman & Wakefield. “I’m expecting to see [Swedish] house prices fall by 15% in the year ahead, once banks raise their interest rates.”

And some countries are still basket cases. Bulgaria, where the real estate market once boomed on sales of vacation homes to wealthy Russians and Europeans, saw second quarter prices fall 9.7%, on top of a 12.4% decline during the first quarter.

The speed at which loans on commercial properties such as office buildings and malls are souring is “unprecedented,” a recent report from Deutsche Bank said. The delinquency rates on these loans reached 4.1% in June, more than double the March rate. Banks are most vulnerable because they hold about $1 trillion of commercial real estate loans and an additional $530 billion in construction loans.

Job losses have led to rising office vacancies. Tight fisted consumers have helped close retailers such as Circuit City, forcing mall landlords to default on loans. That is having a tiered effect on the banking industry:

* It is especially noxious for the smallest banks, which have very large portions of their loan portfolios exposed. That’s the chief reason bank failures have hit 89 this year, vs. 25 for all of last year. For instance, one of the latest banks to fail, Affinity Bank, had 46% of its $805 million in loans to commercial properties. That compares with 33% for all banks, says Keefe Bruyette & Woods.

* Regional banks are also highly exposed and are a bigger worry for the economy because many are large. United Commercial of San Francisco is first on the “top potential concerns” list of Barclays Capital research. The bank, with assets of $12.7 billion, missed a regulatory deadline for filing its second quarter report and is restating its 2008 financial statements. Tuesday, it named a new CEO. United Commercial wouldn’t comment.

* The very largest banks, those with at least $1 trillion in assets, are less exposed. JPMorgan Chase has about 5.4% of such loans, and Citigroup has 3.4%, according to government filings. Among them, Wells Fargo has the largest exposure, with about 16.5% of its $821 billion loan portfolio made up of commercial mortgages or construction loans.

Meanwhile, bank stocks, as measured by the Financial Select Sector SPDR exchange traded fund, which suffered big losses previously, are up about 150% since the March low, more than double the broad market’s gains. Yet the potential danger to the banking industry could grow, because the losses will likely get worse.

The National Association of Realtors projects that retail vacancy rates will increase from 11.7% in the second quarter of 2009 to 12.9% in the same period of 2010, the highest vacancy rates since 1991. And office building vacancy rates are expected to rise from 15.5% to 18.8%. “Who knows how long it will take to fill the building with employees again?” says Fred Cannon, chief equity strategist at Keefe Bruyette & Woods.

During the heyday of no money down lending, you were unlikely to have a buyer using a government insured Federal Housing Authority (FHA) loan, which lets borrowers purchase a home with a down payment of as little as 3.5%. Now FHAs are the only game in town for anyone who can’t put down the minimum 10% many banks require to get a conventional loan.

About a third of buyers have 10% or less saved for a down payment, according to a recent Zillow.com survey. No wonder FHA loans have skyrocketed from 3% to 25% of the market. While you may not need to take out an FHA mortgage to purchase your next home, there’s a good chance you’ll be selling to someone who does.

2. Borrowers Can Qualify With Any Income

Historically FHA loans have gone mostly to low income borrowers. But, in fact, there’s no cap on what someone can earn. “The overriding factor that we look at is the ability to make payments,” says Lemar Wooley of the Department of Housing and Urban Development.

Borrowing limits may be higher than you think too: Though the max is $271,050 in areas where real estate is cheap, buyers can take up to $729,750 in high priced markets like California or New York.

3. Expect A Tough Appraisal

The home will need a clean bill of health from a government approved appraiser, and the seller must fix any issues before a buyer can close on the loan. A few years ago the FHA eased up on repair requirements for minor problems like missing handrails or cracked windows. But it still won’t budge on leaky roofs or mold damage.

If you’re selling, know that an FHA appraisal stays on record for six months, even if the deal goes kaput or the buyer switches lenders. “Get one low FHA appraisal and you’re stuck with it,” says Dallas realtor Bruce Lynn.

4. These Loans Are Pricier Than They Seem

Nominal rates on FHA mortgages are comparable to those on conventional loans. But hefty fees on the FHA variety up the cost. There’s a 1.75% upfront charge as well as a 0.5% annual insurance premium for five years and until the principal balance hits 78% of the sales price or the home’s appraised value.

If you’re buying, ask if the seller will pick up some of the insurance costs as part of the deal, says Manchester, N.H., realtor Scott Godzyk. According to FHA rules, sellers can pay closing costs up to 6% of the home price.

5. But They’ve Gotten Easier To Obtain

FHAs once had a well deserved rep for onerous paperwork and a longer, more difficult closing than conventional loans. But thanks to a new automatic underwriting system and the looser repair requirements, FHA mortgages take only a few days longer than conventional loans to close, says Bill Banfield, a vice president at Quicken Loans.

FHA loans still require written documentation of income, including pay stubs and tax returns. But stricter underwriting across the board means that you will probably need such paperwork no matter what type of loan you get.