Homebuyers are discovering the benefits of bank failures: lower mortgage rates

An unexpected consequence of recent bank failures is that mortgage interest rates have fallen and may continue to fall.

According to Mortgage News Daily average rates on 30-year fixed-rate loans, homebuyers found a sweet spot for a crash that ricocheted through the financial sector as mortgage rates fell briefly on Monday before rising again. Rates fell to 6.57% after news of the financial turmoil spread from just above 7% a few days earlier. But by Tuesday they rose to 6.75% as the market took in the news.

With the start of the spring housing market, rate cuts are usually good news for homebuyers. Reducing even a fraction of a percentage point can mean significant savings. But buyers may be too scared by the collapse of Silicon Valley Bank and Signature Bank and the possibility of new excitement to make what could be the biggest purchase of their lives.

“When there is any economic uncertainty, mortgage rates tend to come down,” says Ali Wolf, chief economist at the construction consulting company Zonda. “Ahead of the collapse of Silicon Valley Bank, mortgage rates were approaching 7%. Mortgage rates were on the rise, and that became bad for homebuyers.

“If we see more bank failures and increased financial instability, mortgage rates will continue to be lower,” adds Wolf.

Many economists believe that the Federal Reserve will reverse course and slow or even halt expected rate hikes in response to bank failures. The Fed’s continued rate hikes over the past year have led to higher mortgage rates, which are separate but dependent on the Fed’s rates. Higher mortgage rates have brought the housing market to a halt as buyers struggle to afford still-high home prices along with higher mortgage rates.

A less aggressive Fed hike could help mortgage rates stay in the 6% range. And there is a chance that they will fall a little lower, especially if there are more bankrupts.

It is still unclear whether the failures of Silicon Valley Bank (which catered to venture capitalists and tech startups), Signature Bank (which welcomed deposits in crypto) and Silvergate Bank (which focused on crypto) are isolated incidents or the start of much larger problems. in the financial sector.

And even though the federal government has stepped in to make Silicon Valley and Signature Banks customers whole, higher interest rates and future runs on banks could expose more bad investments and weaknesses in the banking sector. More bank failures could further set back an already struggling housing market, crushed by higher mortgage rates.

“If it’s individual [bank] failures, the real estate market could benefit from lower mortgage rates,” says Thomas Yandik, professor of finance at the University of Arkansas at Fayetteville. “If this is a systemic failure of the banking sector, then, naturally, this will negatively affect the economy, dragging the real estate market with it.”

Why mortgage rates are falling

There is no easy answer to why mortgage rates rise one moment and fall the rest of the time.

As the Federal Reserve raised its short-term rates to tame inflation, mortgage rates rose. The Fed was expected to continue aggressively raising rates, but the banking crisis is likely to slow down or even temporarily suspend rate hikes. This would give mortgage rates a little room to fall.

“The Fed is stuck between its mandate of price stability (i.e. reducing inflation) and the need to maintain financial stability in the economy.” Lisa SturtevantThis is stated in a statement by the chief economist of Bright MLS. The Multiple List Service covers the mid-Atlantic region. “Due to the size of bank failures and a growing understanding of how rapidly rising interest rates are affecting the financial system, it’s possible the Fed could reverse course.”

The Silicon Valley Bank failed because it invested in long-term bonds and mortgage-backed securities, which are mortgage packages that lenders sell to investors to free up money to make new loans. Because the bank bought bonds when rates were low, the bonds lost value as rates rose over time. When the bank was raided by customers, it didn’t have the cash it needed and failed. Following the collapse of the Silicon Valley bank, Signature’s exposure to cryptocurrencies also worried customers, sparking a similar run on the bank. This led to another failure.

The Fed may not want to aggressively raise rates to keep the financial sector stable.

While a small rate hike could be good for the housing market, the Fed is unlikely to cut rates until inflation is under control. Inflation in February was 6% higher than a year ago, according to the Labor Department’s consumer price index released Tuesday.

“We still have inflation issues, so I don’t expect the Fed to cut rates unless the economy goes into a tailspin,” Jandik says.

Another force working in favor of homebuyers is investors. When investors worry about what’s going on in the economy, they tend to take their money out of the stock market and invest it in bonds and mortgage-backed securities, also known as mortgage bonds, which are considered safer investments. This is exactly what they have done in the last few days.

When the demand for bonds rises, so do the prices. And when prices rise, mortgage rates fall.

But some buyers may be too scared to act given the financial unpredictability.

“Lower rates are good, but the resulting uncertainty could cause homebuyers to put off buying because it’s a very important financial decision,” says Realtor.com’s chief economist. Daniel Hale. “Uncertainty is bad for consumer confidence.”

How will bank failures affect the spring housing market?

Ironically, bank failures can help cash-strapped homebuyers. If rates were to drop even half a percentage point, the typical monthly mortgage payment would be about $100 less than it is today.

(This assumes rates dropped from 6.75% to 6.25% for a 30-year fixed-rate home loan priced at $414,950. It also includes a 20% down payment and excludes taxes, insurance, and other expenses. .)

Buyers need to check rates daily, and in some cases even hourly, as rates may change in the coming weeks.

“If you’re trying to make a decision based on mortgage rates, it’s important to contact your lender regularly,” Hale says.

It could also give intrepid buyers more market power as financial turmoil shrinks their ranks.

“Show your power, negotiate,” says Wolf. “This could be a good time to buy because you won’t have such a competitive market and you will have sellers who want to work with you.”

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