Silicon Valley Bank in California collapsed recently drawing attention to the relevance and importance of risk management. In the case of SVB, it invested heavily in tech-related venture capitalist groups.
In many instances these start ups had no performance records and were grossly undercapitalized. To absorb these gambles the bank had to continue to grow its deposits and when that effort floundered two weeks ago, a “bank run” emerged and the withdrawals set off the collapse.
This multi-billion dollar melt down spooked the banking industry. The situation was exacerbated by the subsequent shutdown of Signature Bank by the FDIC on the East Coast.
This pushed many investors to buy in to the relative safety of U.S. government bonds. The two-year Treasury note yield dropped at the fastest rate in 36 years and the 10-year note reacted similarly moving below 3.4%.
What it means
Mortgage rates don’t move with the Federal Reserve rate, as many folks think. Mortgage rates move in tandem with the two-year and 10-year Treasury notes which are influenced by market pressures.
The Federal Home Loan Mortgage Corporation, or Freddie Mac, which was chartered by Congress in 1970 to ensure the availability of funds to mortgage lenders to encourage homeownership, says that there’s a silver lining in this banking turbulence.
“Mortgage rates are down following an increase of more than half a percent over five consecutive weeks,” Freddie Mac recently reported. “Turbulence in the financial markets is putting significant downward pressure on rates, which should benefit borrowers in the short-term.”
This uncertainly was reflected in Freddie Mac’s report which showed downward movement on average for a 30-year-fixed-rate mortgage to 6.6%. Freddie Mac went on to report that the downward drift in mortgages would spawn “immediate activity in mortgage applications.”
The Mortgage Bankers Association’s recent report supported that prediction when it reported a 6.5% increase in mortgage applications week-over-week for the week ending March 10. Their report preceded the SVB collapse and reflected an already existing lower drift in mortgage rates as well as a leveling out of home priced increases and an improving inventory in available homes.
The demise of the SVB and its impact on the Treasury Note portfolio means that mortgage application activity should see an even stronger increase in the coming weeks, or at least until investors regain their confidence in the banking industry and return to those accounts.
The ancient Chinese general Sun Tzu theorized that there is opportunity in chaos. And so it is here.
This downward pressure on mortgage interest rates may be short lived. Current economic conditions may, however, prevent a rebound effect.
Remember that mortgage rates are more market driven than anything. Where there’s a vacuum in demand, lenders need react to beef up that demand and the surest way to do that is keep interest rates lower and present programs that take the edge off higher rates, such as allowing sellers to “buy down” a buyer’s interest rate and offering adjustable rate mortgages.
And this they are doing.
This is reflected in the 8.1% jump in pending home sales for January and the slower increase (6.6%) in home prices in 2022.
The media’s constant “doom and gloom” drumbeat is just that: noise.
The recent dips in the reporting of home sales means that the residential real estate market is returning to normality after the pandemic inspired peaks.
And means the return of the buyer-seller equilibrium which benefits all players.
Buy or sell your house based on your goals and needs and ignore the cacophony of the media pundits.
Gary Wisenbaker (#garysellsvaldosta) is a Realtor with Century 21 Realty Advisors in Valdosta and can be reached at (912) 713-2553 or firstname.lastname@example.org.