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The recent collapse of several banks, including Silicon Valley Bank, has sent shockwaves through an already fragile economy. Lawrence Yun, the chief economist of the National Association of REALTORS®, suggests that this turmoil could significantly impact the real estate industry. He anticipates that the Federal Reserve will adopt a less aggressive stance on raising short-term interest rates due to these bank failures. Consequently, mortgage rates are expected to decline, potentially stimulating the housing sector.
According to Freddie Mac, mortgage rates have been rising steadily, with the 30-year fixed-rate loan averaging 6.73% last week. In recent months, the Fed’s aggressive rate hikes have indirectly driven up mortgage rates. However, following the bank collapses, mortgage rates dropped by approximately 50 basis points compared to the previous week. Yun explains that financial market panic often drives investors to safer assets like U.S. Treasury notes and bonds, causing mortgage rates to track the falling yields of these treasuries.
Yun also notes that panic in the financial markets could lead to a mechanical stimulus for the economy through lower interest rates. The housing sector typically responds positively to falling mortgage rates, especially when job growth accompanies these changes. Lower rates could encourage more homebuyers to enter the market if this trend continues.
The collapse of these banks has sparked widespread concern and could lead to job losses, particularly among tech companies in California that depended on Silicon Valley Bank and others for funding. Despite this, Yun believes that the potential for lower mortgage rates could attract more homebuyers nationwide. The federal government has stepped in to backstop all deposits to prevent mass panic, but the unfolding situation’s impact on the real estate market remains uncertain and warrants close monitoring.
Federal Reserve’s Rate Hike Amid Bank Collapses
The recent collapse of Silicon Valley Bank and Signature Bank, alongside broader international financial volatility, has complicated the Federal Reserve’s decision-making. Despite these challenges, the Fed announced a 0.25% increase in the target federal funds rate, likely resulting in tighter credit conditions affecting economic activity, hiring, and inflation.
The Fed’s decision to raise rates is based on indicators showing moderate growth in spending and production, strong job gains, and low unemployment rates, despite elevated inflation at 6.0% as of February 2023. During the pandemic, interest rate targets were set between 0.0% and 0.25% to stimulate the economy but have now risen to between 4.75% and 5.0%.
The purpose of these rate hikes is to reduce inflation by increasing borrowing costs, discouraging consumers and businesses from taking on debt. However, the collapse of these banks has complicated this strategy. For instance, Silicon Valley Bank had to sell a bond portfolio at a loss due to the higher interest rate environment, leading account holders to withdraw funds. The Federal Deposit Insurance Corporation insured all accounts to prevent further bank runs.
The Federal Open Market Committee maintains that the financial system is resilient but acknowledges the uncertainty and potential far-reaching effects of recent events. A study indicates that the Fed’s restrictive monetary policy has decreased the value of bank assets by 10%, making banks more vulnerable to runs from uninsured depositors.
Federal Reserve Chair Jerome Powell has noted that the robust labor market and persistent inflation in certain sectors mean that policymakers will continue to gradually increase target interest rates. However, household wages have declined over the past two years, even with low unemployment rates.
U.S. Inflation Drops to Two-Year Low
U.S. inflation fell to its lowest level in nearly two years in March, with egg prices leading the decline. However, persistent underlying price pressures suggest that the Federal Reserve may consider another interest-rate increase at its May meeting. The consumer-price index rose by 5% last month compared to the previous year, down from February’s 6% increase and the smallest gain since May 2021. Despite the overall decline, core inflation, which excludes volatile food and energy prices, remains high due to rising shelter costs.
In summary, the recent bank collapses have introduced new complexities into the economic landscape, affecting decisions on interest rates and impacting mortgage rates. While lower mortgage rates could stimulate the housing market, the broader economic implications of tighter credit conditions and persistent inflation continue to pose significant challenges.
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