The Avenue APRIL 2023 SLO Real Estate Newsletter

The Avenue APRIL 2023 SLO Real Estate Newsletter

SLO County Market Update / Bank Failures & Real Estate

The beginning of March brought about three bank failures within a week. Many people wonder if these collapses will trigger volatility in the real estate market as well.


What Happened:

The first bank to fall was Silvergate, based out of La Jolla, CA. It had highly invested in cryptocurrencies (which are not marketable securities) and announced it would close operations and return assets to depositors. Two days later, Silicon Valley Bank (which served a niche clientele of venture-backed tech startups) experienced a classic bank run as investors started withdrawing their funds to meet liquidity needs; their appetite for risk slowed by the Fedā€™s interest rate hike. Another two days later, regulators shut down New Yorkā€™s Signature Bank, (also heavily invested in crypto) in an effort to curb the contagion as depositors were withdrawing large amounts of money, their fears piqued due to the failure of Silicon Valley Bank.Ā 

A History of Financial Crisis:

Many people remember the 2008 financial crisis and the impact it had on the housing market. Because banks provide lending for mortgages, when a bank fails, there can be a ripple effect.Ā 

However, in the years leading up to the meltdown, banks were on a lending spree, with even subprime borrowers approved for loans. This created a saturated housing market; so as interest rates rose, prices of homes fell dramatically. Many people became upside down in their homes and were forced to sell for much less than what they borrowed. The resulting foreclosures caused a glut of homes on the market, further depressing prices.

By the end of the fallout, 3.8 million Americans had lost their homes to foreclosures, unemployment was at 10%, the FDIC had closed 465 banks and the economy was in a full-blown recession causing stock markets around the world to tumble.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed, prohibiting banks from repeating the risky behavior, increasing government oversight and forcing banks to maintain larger cash reserves. These improvements are meant to help mitigate the potential for another large-scale collapse.

Why Today is Different:

The bank failures in March have a limited effect on the real estate market for a few reasons, starting with the fact that the current real estate market is fundamentally different than the market we had in 2008.Ā 

Prior to the 2008 crash, there was an oversupply of homes and an increasing number of homeowners who were unable to make their mortgage payments. This led to a large number of foreclosures, which further exacerbated the oversupply issue.

Today, the market is characterized by a shortage of homes, which has resulted in increasing prices and competition among buyers. Additionally, mortgage lending standards have become stricter, which has resulted in fewer risky loans being issued.

The real estate market is also not directly tied to the crypto market. The failure of SVB, Silvergate and Signature does not mean that the broader banking industry is in trouble. Some banks may have exposure to the cryptocurrency market, however most are well-capitalized, well-regulated and not at risk of failure. The banking system is much more resilient now. Banks are required to hold more capital as a cushion against potential losses, and the Federal Reserve has established mechanisms to provide liquidity to the market during times of stress.

Last monthā€™s bank failures may have some indirect impacts, given the fact that these banks were lenders that provided financing to many businesses, including those in the real estate industry. It is true, there is now less lending capacity available. However, these three banks are not likely to cause a widespread collapse because the banking and real estate industries are both vast and diverse, with many different types of buyers, sellers, lenders and investors. Some experts believe the loss of Silicon Valley Bank will have an effect on the Silicon Valley startup economy and commercial real estate, but a negligible impact on the residential real estate market within Silicon Valley itself.Ā 

There is always risk and uncertainty in any market, however our current system is much more resilient than it has been in the past.

 


Interesting Fact:

ā€œThe Nine Sistersā€ (otherwise known as the ā€œMorrosā€ and known locally as the ā€œSeven Sistersā€) is actually a chain of 23 volcanic peaks that stretch from SLO to Morro Bay.


 

The Avenue APRIL 2023 SLO Real Estate Newsletter The Avenue APRIL 2023 SLO Real Estate Newsletter

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