According to Mortgage News Daily's average rate for a 30-year fixed-rate loan, homebuyers found a glimmer of hope in the financial sector's collapse as mortgage rates rose again after a brief drop on Monday.
As news of the financial meltdown spread, rates had fallen to 6.57 per cent, slightly higher than the 7 per cent of a few days earlier. By Tuesday, however, rates had risen to 6.75% as the market digested the news.
With the housing market kicking off in the spring, the usual drop in interest rates is good news for homebuyers. Even a drop of a fraction of a percentage point can equate to significant savings. But homebuyers may be too intimidated by the collapse of Silicon Valley Bank and Signature Bank and the potential for more turmoil to make what could be the biggest purchase of their lives.
"Mortgage rates tend to go lower when there's any kind of economic uncertainty," says Ali Wolf, chief economist at construction consulting firm Zonda." Going into the Silicon Valley bank collapse, mortgage rates were pretty close to 7 per cent. Mortgage rates are rising, and that's starting to get bad for homebuyers.
"If we see more bank failures, if we see more financial instability, mortgage rates will continue to go down," Wolf added.
Many economists believe the Fed will reverse course and slow or even pause its expected rate hikes in response to bank failures. The Fed's steady pace of rate hikes over the past year has pushed up mortgage rates, which are independent of, but influenced by, the Fed's rates. Higher mortgage rates have crippled the housing market as homebuyers struggle to afford still-high home prices and higher mortgage rates.
Less aggressive rate hikes by the Fed could help keep mortgage rates in the 6% range. And there is a possibility that they could fall even lower, especially if more banks fail.
It is unclear whether the failures of Silicon Valley Bank (which caters to venture capitalists and tech startups), Signature Bank (which welcomes cryptocurrency deposits) and Silvergate Bank (which focuses on cryptocurrencies) are isolated incidents or the start of a larger problem in the financial sector.
Even if the federal government steps in and makes Silicon Valley Bank and Signature Bank customers whole, higher interest rates and future runs on banks could reveal more bad investments and weaknesses in the banking industry. More bank failures could set back the already troubled housing market even further and crush it with higher mortgage rates.
"If it's an individual [bank] failure, the housing market could benefit from lower mortgage rates," says Thomas Jendick, a professor of finance at the University of Arkansas in Fayetteville." If it's a systemic failure in the banking sector, then the economy will naturally be negatively affected, dragging down the real estate market."
There is no simple answer as to why mortgage rates go up one minute and down the next.
As the Federal Reserve raises its short-term interest rates to curb inflation, mortgage rates are rising. The Fed is expected to continue to raise rates aggressively, but the banking crisis may slow down or even suspend rate hikes for a while. This will leave a little room for mortgage rates to come down.
"The Fed is caught between its mandate to stabilise prices (i.e. reduce inflation) and the need to maintain financial stability in the economy," said Lisa Sturtevant, chief economist at Bright MLS, in a statement. This multiple listing service covers the Mid-Atlantic region." The Fed is likely to change direction because of the size of the failed banks and the growing awareness of the impact of rapidly rising interest rates on the financial system."
Silicon Valley Bank failed because it invested in long-term bonds and mortgage-backed securities, which are bundles of mortgages that lenders sell to investors to free up capital to make new loans. As the bank bought these bonds when interest rates were low, they lost their value as interest rates rose over time. When customers made a run on the bank, it failed without the cash it needed. Signature's exposure to cryptocurrencies also worried customers after the collapse of Silicon Valley Bank, triggering a similar bank run. This led to another failure.
The Federal Reserve may be reluctant to aggressively raise interest rates to ensure the stability of the financial sector.
While smaller rate hikes could be beneficial to the housing market, the Fed is unlikely to lower rates until inflation is well under control. Inflation in February was 6 per cent higher than a year ago, according to the closely watched Consumer Price Index released by the Labor Department on Tuesday.
"We still have an inflation problem, so I don't expect the Fed to cut rates unless the economy goes into a tailspin," Jendik said.
Another force working in favour of homebuyers is investors. When investors are worried about what's happening in the economy, they tend to pull their money out of the stock market and into bonds and mortgage-backed securities, also known as mortgage bonds, because they are considered safer investments. This is exactly what they have done in the past few days.
When the demand for bonds rises, so do prices. And when prices go up, mortgage rates go down.
But given the unpredictability of finance, some buyers may be too intimidated to act.
"Lower interest rates are good," says Danielle Hale, chief economist at Realtor.com, "but the uncertainty created could cause homebuyers to delay their purchases because it's a major financial decision." Uncertainty is bad for consumer confidence."
Ironically, bank failures may end up helping cash-strapped homebuyers. If interest rates fall by even half a percentage point, a typical monthly mortgage payment will be about $100 less than it is now.
(Assuming the interest rate on a 30-year fixed-rate loan drops from 6.75 per cent to 6.25 per cent and the home sells for US$414,950. (It also takes into account a 20% down payment and excludes taxes, insurance and other fees).
Buyers need to check rates daily, and in some cases even hourly, as they could bounce back in the coming weeks.
"It's important to check with your lender regularly if you want to make a decision based on your mortgage rate," says Hale.
It may also give intrepid buyers more power in the market as financial instability thins their ranks.
"Flex your muscles and negotiate," says Wolfe." This could be a good time to buy because you won't have as much competition in the market and you'll have some sellers who want to work with you."
