“Every time the Fed raises interest rates, something breaks in the market.” That is one of the phrases that has been repeated most often in the last month among analysts and traders after what happened with Silicon Valley Bank first, Credit Suisse later and now Signature Bank and First Republic Bank.
These are all examples of the banking crisis, which is still far from what happened in 2008, but has investors, savers and financial markets worried.
What happened?
It all begins with the collapse of a relatively unknown entity in the United States, the Silicon Valley Bank.
Here's the timeline: As the Fed raised interest rates and pro-crypto bank Silvergate went under, Silicon Valley Bank's savers and investors began to massively withdraw capital from the bank to address its liquidity problems.
Faced with the flood of requests, the bank was forced to sell part of its public debt portfolio (investment in bonds) with a loss of 1.8 billion euros. At the same time, investor distrust caused the share price to plummet.
In the end, the bank ran out of money to meet the withdrawal requests of its users and had to file for bankruptcy. That is the summary of what happened with this bank, whose process was faster because:
• 1. Work with companies in the technology sector, which are the ones that use credit the most and the ones that were most punished by the Fed's rapid rate hike.
• 2. The concentration of its clients in the same sector and geographic area created a pull effect that accelerated the entire process.
Following the bankruptcy, the state took over the bank, also guaranteeing deposits above the general limit of $250,000 and creating a new one-year financing mechanism, through which troubled institutions can borrow money by providing as collateral the public debt they have in their portfolios, something that has been at the heart of the problem.
The key question that many are asking is how could it be that Silicon Valley Bank did not have the money to meet the requests of its users, or at least the majority of them. The reason is that a large part of the bank's money was invested in a portfolio of long-term government bonds , which, although safe because they pay an annual coupon, things change if you want to sell them early.
Silicon Valley's bonds were old and offered limited returns. When they went to sell them, the new bonds issued by the government tripled the yield of the ones the bank had in its portfolio. As a result, they had to sell them at a lower price than they bought them and take losses.
In other words, the bank's supposed coverage and solidity was not such because of how it was constructed.
From Silicon Valley to Credit Suisse
How can a regional bank affect one of Europe's largest banks? That is the next question that arose in the face of Credit Suisse's troubles.
To begin with, there was a contagion effect of investor fear. It is the famous saying “when you see your neighbor’s beard being cut, put yours to soak.” The fall of Signature Bank and Silicon Valley put investors in European entities on alert, and Credit Suisse had been pointing it out for some time. In other words, the problems of the Swiss investment bank were not new and had been going on for years (it had already reported heavy losses in 2021 and 2022).
First came the capital withdrawals and the subsequent fall in the stock market (it plummeted by 30%), but the trigger was the refusal of the Saudi state bank SNB to inject more money into the entity. In short, Credit Suisse was left without support for the funds it needed to obtain.
The emergency solution was the purchase of Credit Suisse by UBS (another Swiss bank) for 3 billion euros, a bargain price and well below its last stock market price, which is being investigated.
Following the fall of the Swiss giant, one of these entities considered systemic (affecting the entire banking system) has now joined: First Republic Bank, as large as Silicon Valley Bank before the fall, and whose shares have lost more than 90% of their value.
In short, another entity on the tightrope within the new banking crisis of confidence that may not be over.
How does this affect the real estate market?
Does this have any impact on the real estate market? Does it signal a change in real estate trends for 2023? It is still a bit early to know exactly how this will change the forecasts, but it could.
The way it will do this will be through interest rates, lending, and overall confidence (or lack thereof). Here are three ways the banking crisis will affect real estate, mortgages, and home sales:
Possible change in interest rate policy by the Fed and the ECB
Much of what has happened is due to the rapid rise in interest rates by the US Fed, which the market had discounted would continue with further increases of 0.5 points. Now the issue is not so clear and there is talk of a final increase of 0.25 points or a pause to avoid worsening the crisis in the sector.
In Europe, the European Central Bank (ECB) has been less aggressive with its rate hikes and it seems that there may still be room for growth, as the organisation continues to assure that controlling inflation is its main objective. What remains to be seen is whether they will be as aggressive as expected or will be moderated to avoid collateral damage such as another collapse of banks or of some company in the real estate sector.
A change of trend in mortgages and credit?
As a result of all of the above, mortgage interest rates and their trend may change.
If the ECB does not raise rates or raises them less than expected, the Euribor could slow down its upward trend. In fact, this is already happening. The possibility that we are facing the peak of interest rates or very close to it will stop putting upward pressure on the main mortgage benchmark index.
This would be the positive side for mortgages, which may stop increasing in price in the medium term. The negative side would be the granting of credit, which would be lower with high rates. In addition, it is expected that the conditions for accessing a mortgage will become more stringent.
What does not seem likely to change is the greater supply of variable rate mortgages compared to fixed rate mortgages and the rebirth of mixed mortgages .
Stable prices, but with possible buying opportunities
For now , a fall in housing prices is not expected. Demand is still higher than supply, especially for new housing. This will keep prices stable.
What may arise are buying opportunities. On the one hand, if interest rates remain high, some will be forced to sell if they cannot meet their mortgage payments.
On the other hand, one of the consequences of the new rental law may be that more homes will be put up for sale, although it is still too early to know because many details about it are unknown.
