The recent collapse of several banks, including Silicon Valley Bank, has created shockwaves throughout the already-fragile economy. According to Lawrence Yun, the chief economist of the National Association of REALTORS®, this could impact the real estate industry. Specifically, Yun believes that the Federal Reserve will be less aggressive in raising its short-term interest rates due to bank failures. As a result, mortgage rates are likely to decline, providing a potential stimulus to the housing sector.
As per Freddie Mac, mortgage rates have steadily increased in recent weeks, with the 30-year fixed-rate loan averaging 6.73% last week. In recent months, the Fed has been aggressively raising interest rates, indirectly affecting mortgage rates. However, on Monday, mortgage rates had fallen approximately 50 basis points lower than the previous week. Yun explains that when there is a panic in the financial market, investors often shift their money towards safer assets, such as U.S. Treasury notes and bonds. As a result, mortgage rates tend to follow the movement of Treasury yields, which are currently falling.
Yun also notes that a panic in the financial market could lead to a mechanical stimulus to the economy from lower interest rates. The housing sector usually responds positively to falling mortgage rates, mainly when there are job additions to the economy. If rates do indeed head lower, more homebuyers are likely to enter the housing market in response.
The bank failures have sparked panic and could result in job losses, particularly among California tech companies relying on Silicon Valley Bank funding and others. However, Yun believes that lower mortgage rates could encourage more homebuyers to enter the market across the country. It remains to be seen how this situation will unfold, and the federal government has taken steps to backstop all deposits to avoid mass panic. Nonetheless, the potential impact on the real estate market is worth monitoring.