The instability of the stock market, punctuated this week by Monday's record 508-point drop in the Dow Jones industrial average, may make real estate a more attractive investment, housing and banking experts said this week.

For prospective home buyers who did not lose the money for their down payments when their stock prices dropped drastically, buying a new home might make sense since interest rates on 30-year fixed-rate mortgages are expected to decline within the next week by one-quarter to one-half of a percentage point to 10 1/2 percent. For investors, buying commercial property in certain parts of the country may be a more stable, long-term investment than investing in the stock market.

But experts agreed that this is not a time to make any hasty investment decisions until there are clearer signs that there won't be more drastic swings in the stock market and interest rates and until Congress and the administration act to reduce the budget and trade deficits.

"The name of the game is to wait it out until the dust settles," said Robert K. Heady, publisher of Bank Rate Monitor, a weekly newsletter that analyzes interest rates of lenders from around the country. "There's no certainty where the {mortgage} rates will be next month."

The recent decline in yields on short- and long-term Treasury bonds is cited as the principal reason for an expected decline in mortgage rates. Those Treasury bond rates have dropped more than 1 percentage point in the past week.

Many investors, frightened by the nose dive in stock prices Monday, switched to what they perceived as the more stable and safer Treasury bills, notes and bonds. That caused bond prices to rise and their yields to go down.

Many lenders use the Treasury bond yields as a guideline to setting other long-term rates, such as mortgage rates.

"If you had savings in the stock market to make a down payment for a house, you're not going to be in good shape," said Warren Lasko, executive vice president of the Mortgage Bankers Association of America. "But no question this will have an immediate effect on rates. Interest rates on long-term Treasury bonds dropped and mortgage rates will follow. Investors have moved their money toward quality -- to government securities where there are fixed interest rates."

But Lasko and other experts said the rate decline is not expected to go on for long. The steady rise in mortgage rates in the past few months has put a damper on new home sales and new construction, leading many economists to predict at least a 10 percent drop in the number of housing starts in the coming year.

Heady said this week's survey of banks and thrifts shows that many are confused about where to set their rates. On average, most lenders have increased their interest rates on 30-year fixed-rate mortgages by one-quarter of a percentage point from last week to 11.77 percent. The interest rate on a one-year adjustable-rate mortgage was 8.59 percent, up from 8.21 percent last week, the survey showed.

The confusion among lenders is seen throughout the country, Heady said. In Los Angeles, he said, one lender increased the interest rate on a 30-year fixed-rate mortgage three-quarters of a percentage point, while another lender lowered the rate on a similar loan by one-half of a percentage point. In the New York area, several lenders raised rates to at least 13 percent and as high as 13.63 percent.

At the same time, Heady and other experts said the stock market instability has had a calming effect on the skyrocketing interest rates on mortgages.

"Before the crash, the interest rates were rising to the extent that it was out of control," said Kent W. Colton, executive vice president of the National Association of Home Builders. "But now, interest rates have stabilized or are dropping. There are a lot of homeowners who are going to realize that investing in housing or real estate is much more stable. It has greater long-term potential."

John B. Levy, senior vice president of Sovran Mortgage Corp., said he has never seen such fluctuation in interest rates. On Monday morning, he said, he talked to a client about a 10-year, 11 1/2 percent construction loan. By Tuesday afternoon, when he was trying to complete the paperwork, he said the rate had dropped to 10 1/2 percent.

"In a two-day period there was a 100-basis-point decline in rates," he said. "We have never had a monthly rate move of more than 80 basis points."

Many developers and builders said they are taking a cautious attitude and trying to function as normally as possible given the conditions.

"As of now, we haven't made any changes and don't plan on making any changes," said Ronald E. Walton, president of Walton Corp., which is constructing Dominion Point, a two-building, 60,000-square-foot project in Loudoun Tech Center on Rte. 7. "We've been more affected by the recent rise in interest rates."

Thomas Regan, a local developer and former executive director of the Pennsylvania Avenue Development Corp., said real estate as an investment is only enhanced by the swings in the stock market. "The downside is that companies will look at expansion plans more closely," he said.

F. Joseph Moravec, president of Legget McCall Grubb & Ellis, a local brokerage firm, and head of the D.C. Association of Realtors, agreed. "The main effect is that it {stock market instability} delays things," he said. "It's a chaotic kind of environment and it affects the way people go about handling business decisions. Right now, they're just not doing anything."

Oliver T. Carr, board chairman of The Oliver Carr Co., a major developer in the District, said one of the negative factors is that many foreigners, who have been investing heavily in commercial property in the United States, may delay or cancel further investment.

Bernard Mannekin, chairman of Mannekin Corp., a prominent Maryland developer, said the events of the past week should send a clear signal to the government to deal with the problems of the budget and trade deficits.

"It's a warning to the economy and the real estate industry, which is an integral part of the economy, that the government must address {these problems} in a positive way," he said. "You can't sweep them under the rug or use any Band-Aid approaches."