How the turmoil in US banks affects the housing market


March 17, 2023 | 12:52 p.m

The turmoil in the US banking sector is already having knock-on effects on the country’s struggling housing market, which has been hampered by rising mortgage rates over the past year, according to industry experts.

The US economy was rattled this week as the implosions of Silicon Valley Bank, Signature Bank of New York and Silvergate Capital raised concerns about contagion. Those fears were heightened on Friday when investors observed problems at two other banks – Credit Suisse and First Republic.

On the downside, banking sector woes could cause further damage to house prices in activity on the West Coast – where several cities’ markets were already considered “overheated” after a spike in the pandemic.

“Some buyers are canceling their contracts or backing out of their home search because they work in technology and they’re worried about losing their jobs,” Bay Area Redfin manager Shelley Rocha said in a statement.

“That spike in tech layoffs already caused jitters, and now the bank crashes are adding to buyers’ nerves.”

SVB was the second largest bank failure in US history.
Anadolu Agency via Getty Images

At the same time, the banking industry’s struggles are likely to have a cooling effect on long-term mortgage rates, which had climbed back above 7% by some measures as the Federal Reserve ramped up more rate hikes.

“Silicon Valley Bank’s failure, along with a few other banks, means the Federal Reserve can’t be as aggressive in raising its short-term interest rates,” said Lawrence Yun, chief economist of the National Association of Realtors. “That’s why mortgage rates will fall.”

The average 30-year fixed mortgage rate fell to 6.6% for the week ended March 16, according to Freddie Mac data.

Prices posted their first weekly decline in more than a month.

Financial fears may be keeping some home buyers and sellers in Silicon Valley on the sidelines.
Bloomberg via Getty Images

Signs of falling mortgage rates coincided with a slight increase in buying activity. Applications for mortgage purchases rose 7% for the week ended March 10 compared with the previous week, according to data from the Mortgage Bankers Association — although they were still down 38% year-over-year.

“Buyers pounced when prices fell because they are so volatile right now, which shows that there are plenty of people waiting in the wings for the right time to enter the market,” Redfin head of economic research Chen Zhao said in a blog post.

Even with a potential drop in mortgage rates, activity in the housing market is still relatively quiet compared to last year.

The average monthly mortgage payment for home buyers is still hovering near an all-time high of $2,556 — up 24% from a year ago, according to Redfin data.

Mortgage rates fell this week for the first time in more than a month.
Getty Images

The housing market will get its next sign of developments in mortgage rates at the conclusion of the Fed’s next meeting on March 22.

Investors are currently pricing in a 68.6% probability that the Fed will raise benchmark interest rates by a quarter of a percentage point and a 31.4% probability that they will pause hikes, according to CME Group’s FedWatch tool.

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