BAM’s Key Details:
- On Friday, March 10, SVB Financial Group became the largest bank to fail since the 2008 financial crisis.
- President Biden delivered remarks about the collapse Monday morning, stating the U.S. banking system is safe.
- Biden also stated no losses would burden taxpayers—one of the key differences between last week’s collapse and the financial crisis of 2008.
On Friday, Silicon Valley Bank (SVB) was closed by California banking regulators and put under the control of FDIC. As the 16th biggest lender in the U.S. at the end of 2022, this makes SVB the largest bank to fail since Washington Mutual, a catalyst for the 2008 financial crisis.
While there are many questions still lingering, one thing is certain: world markets will experience volatility in the coming weeks.
Here’s what the SVB collapse means for real estate.
What happened with SVB?
SVB’s collapse brings back nightmares from 2008. And while the gravity of the situation is heavy, it’s important to note that the circumstances are different.
Silicon Valley Bank offers tech companies—particularly startups—a range of products, including deposit services, loans and cash management. Since most startups have an influx of cash from investors, most of SVB’s money was made on deposits.
With a boom in venture capital funding over the past few years, the banks’ deposit balances more than tripled between the end of 2019 and the start of 2022, to $198 billion. SVB put the majority of these deposits into securities, with some “held-to-maturity” (HTM) assets and the rest “available for sale” (AFS) assets.
According to Marc Rubinstein, former hedge fund manager, “the shorter duration AFS book grew from $13.9 billion at the end of 2019 to $27.3 billion at its peak in the first quarter of 2022; the longer duration HTM book grew by much more: from $13.8 billion to $98.7 billion.”
But as the tech boom slowed, SVB’s startup customers began to ask for some of their deposits back. Word quickly spread among the niche customer group of the bank, with more and more asking for their deposits, eventually leading to a bank run.
SVB had to sell some of its AFS assets to return money to its customers. And since it couldn’t sell HTM assets, it sold $21 billion in bonds last week. In doing so, SVB took a $1.8 billion loss and sought to raise money from investors. Only, the bank failed to raise the capital—and days later, failed completely.
How is this different from 2008?
Last night, FDIC announced that SVB would reopen Monday, March 13, giving all insured depositors full access to their insured deposits, while uninsured depositors will be paid an advance dividend within the next week.
And this morning, President Biden gave a brief address, outlining a few points that make Friday’s bank collapse different than the financial crisis in 2008:
- No losses will burden taxpayers as they did in 2008. Instead, the money will come from fees that banks pay into the Deposit Insurance Fund.
- Management of the banks will be fired.
- Investors in SVB will not be protected.
Another contrast that stands out for the housing market is the cause of the collapse. The mortgage market and housing boom was the main cause of the Great Recession in 2008, while the SVB collapse is linked to the boom in the tech industry.
What the SVB Collapse Means for Real Estate
So, what does this mean for real estate? Byron Lazine covered the topic in-depth on this morning’s Hot Sheet:
We can expect mortgage rates to drop even more this week. On Friday, the U.S. 10 Year Treasury Yield quickly dropped in response to the news of SVB. In turn, mortgage rates declined almost a quarter percent, bringing 30-year fixed mortgage rates to 6.76% to end the week.
As rates continue to fall, we could be back to 6% mortgage rates this week—a bit of a silver lining for home shoppers using a mortgage.
In addition, with weekly inventory and new listing data down from last year, pent-up buyer demand remains strong in many markets. The issue of low inventory, coupled with dropping mortgage rates, could be a perfect scenario for sellers who are ready to act quickly.
But as circumstances continue to change day to day, it’s more important than ever to stay on top of national news and local market trends so you can answer questions and offer guidance in this volatile market.
Byron summed up the collapse and what it means for the real estate industry:
The gravity of this is like 2008. How it relates to housing is nothing like 2008.
