An unexpected consequence of the recent bank failures is that mortgage interest rates have dropped—and could keep falling.
Homebuyers discovered the silver lining to collapses that ricocheted through the financial sector as mortgage rates briefly fell on Monday before ticking back up again, according to Mortgage News Daily‘s average rates for 30-year fixed-rate loans. Rates had dropped to 6.57% as news of the financial turmoil spread, down from just above 7% a few days earlier. But by Tuesday, they were up to 6.75% as the market absorbed the news.
As the spring housing market kicks off, normally rate drops are good news for homebuyers. Even a fraction of a percentage point decrease can equal significant savings. But buyers might be too spooked by the collapse of Silicon Valley Bank and Signature Bank and the possibility of more turbulence to make what could be the largest purchase of their lives.
“When there’s any kind of economic uncertainty, mortgage rates tend to go lower,” says Ali Wolf, chief economist of the building consultancy Zonda. “Going into the collapse of Silicon Valley Bank, mortgage rates were getting pretty close to 7%. Mortgage rates were rising, and it was starting to look bad for home shoppers.
“If we see more bank failures and if we see more financial instability, mortgage rates will continue to be lower,” adds Wolf.
Many economists believe the Federal Reserve will reverse course and slow—or even pause—its anticipated rate hikes in response to the bank failures. The Fed’s steady cadence of rate hikes over the past year has pushed up mortgage rates, which are separate but influenced by the Fed’s rates. Higher mortgage rates have caused the housing market to seize up as buyers are struggling to afford still-high home prices along with higher mortgage rates.
Less aggressive Fed raises could help mortgage rates to stay in the mid-6% range. And there is the potential for them to dip a little lower, especially if there are more bank failures.
It’s still unclear if the failures of Silicon Valley Bank (which catered to venture capitalists and tech startups), Signature Bank (which welcomed cryptocurrency deposits), and Silvergate Bank (which focused on cryptocurrency) are isolated incidents—or the beginning of much bigger problems in the financial sector.
And even though the federal government stepped in to make customers of Silicon Valley and Signature Banks whole, higher interest rates and future runs on banks could expose more bad investments and weaknesses in the banking sector. More bank failures could set back the already struggling housing market, crushed by higher mortgage rates, even further.
“If it’s individual [bank] failures, the real estate market can benefit from the lower mortgage rates,” says Tomas Jandik, a finance professor at the University of Arkansas in Fayetteville. “If it’s a system failure of the banking sector, then naturally the economy is going to be negatively affected, dragging the real estate market with it.”
Why mortgage rates are falling
There’s no one simple answer for why mortgage rates are up one moment and down the rest.
As the Federal Reserve has hiked its short-term rates to tame inflation, mortgage rates have risen. The Fed was expected to continue raising rates aggressively, but the bank crisis is likely to slow down, or even temporarily pause, its hikes. That would give mortgage rates a little room to dip.
“The Fed is caught between its mandate for price stability (i.e., lower inflation) and the necessity of maintaining financial stability in the economy,” Lisa Sturtevant, chief economist of Bright MLS, said in a statement. The multiple listing service covers the mid-Atlantic region. “Because of the size of the banks that failed and the growing awareness of how the fast-rising interest rates are impacting the financial system, it is possible the Fed could shift course.”
Silicon Valley Bank failed because it invested in long-term bonds and mortgage-backed securities, which are bundles of mortgages that lenders sell to investors to free up money to make new loans. Since the bank bought the bonds when rates were low, the bonds lost value as rates increased over time. When there was a run by customers on the bank, it didn’t have the cash it needed and failed. After Silicon Valley Bank’s collapse, Signature’s exposure to cryptocurrency also worried customers, triggering a similar run on the bank. That led to another failure.
The Fed might be reluctant to raise rates aggressively to ensure the stability of the financial sector.
While smaller rate increases could be good for the housing market, the Fed isn’t likely to lower its rates until inflation is well under control. Inflation was running at 6% higher in February than it was a year ago, according to the Labor Department’s closely watched consumer price index released on Tuesday.
“We still have inflationary problems, so I don’t expect the Fed will be lowering rates unless the economy is going into a tailspin,” says Jandik.
Another force working in favor of homebuyers is investors. When investors are worried about what’s happening in the economy, they tend to pull their money out of the stock market and put it into bonds and mortgage-backed securities, aka mortgage bonds, which are perceived to be safer investments. That’s exactly what they’ve done over the past few days.
When demand for bonds rises, so do prices. And when prices go up, mortgage rates fall.
But some buyers might be too spooked to act given the financial unpredictability.
“Lower rates are good, but the uncertainty that’s created could cause home shoppers to put off purchases because it’s such a big financial decision,” says Realtor.com Chief Economist Danielle Hale. “Uncertainty is not good for consumer confidence.”
How will the bank failures affect the spring housing market?
Ironically, the bank failures could wind up helping cash-strapped homebuyers. If rates fell even half a percentage point, the typical monthly mortgage payment would be about $100 less than it is today.
(This assumes rates fell from 6.75% to 6.25% for a 30-year fixed-rate loan for a home priced at $414,950. It also factors in a 20% down payment and doesn’t include taxes, insurance, and other costs.)
Buyers need to check rates daily, even hourly in some instances, as they could bounce around in the coming weeks.
“If you’re trying to make a decision based on mortgage rates, it’s important to check in with your lender regularly,” says Hale.
It could also give intrepid buyers more power in the market as the financial instability thins out their ranks.
“Flex your power, negotiate,” says Wolf. “It may be a good time to buy because you’re not going to have as competitive of a market and you will have some sellers who want to work with you.”
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