As the 16th largest bank in the U.S., Silicon Valley Bank’s (SVB) shutter is the second largest in U.S. history behind Washington Mutual in 2008. Following SVB, Signature Bank was ordered to close, leaving consumers uneasy about the financial system. However, the closures could help slow interest rates, helping home buyers find some respite.
“Because inflation was hotter than expected and job growth was hotter than expected, mortgage rates were going up pretty fast going into SVB’s closure,” says Zonda chief economist Ali Wolf says. “We were getting pretty close to 7% interest rates and mortgage rates would have likely gone higher on last week’s strong jobs report. Yet, here we are in a completely different environment in just a few days’ time.”
The series of events is creating a more buyer-friendly environment that economists are keeping an eye on. “Bank failures tell the Fed that it’s probably time to pause on those short-term rate increases,” Wolf adds.
While closely monitoring mortgage applications—especially in the coming weeks—Joel Kan, Mortgage Bankers Association (MBA) vice president and deputy chief economist, explains the current market and its concerns.
“Treasury yields declined late last week, as market concerns over bank closures and the potential for broader ripple effects triggered a flight to safety in Treasury bonds. This decline pushed mortgage rates for all loan types lower, with the 30-year fixed rate decreasing to 6.71%,” he says. “Home-purchase applications increased for the second straight week but remained almost 40% below last year’s pace. While lower rates should buoy housing demand, the financial market volatility may cause buyers to pause their decisions.”
Bill Banfield, executive vice president of capital markets for Rocket Mortgage, says the large amount of money moving from riskier assets to buying bonds dropped the 10-year yield to a one-month low.
“Beyond traders’ move to safer investments, if the Fed decides to pause its rate hikes next week, the market could react favorably and lead to further drops in mortgage rates,” he explains.
Looking ahead, Wolf shares, “Inflation is still dangerously too hot, but financial stability may be more powerful to the tune that the Fed may pause entirely later this month, or they may only do a 25-point basis increase.”
As buyers hope for affordability, industry experts are eager as new numbers will soon reveal the impact the bank failures could have on the housing market.
“This drop in mortgage rates is significant because rates can dramatically impact home affordability,” Banfield says. “As rates fall, someone looking to buy can either afford more house while keeping their monthly payment the same, or those who have been priced out could now come off the sidelines and start shopping again. If mortgage rates continue to decrease, it could offer relief to potential home buyers this season as more houses start to list while boosting seller confidence that their home won’t sit on the market too long.”
