How turmoil at US banks is impacting the housing market

Turmoil in the US banking sector is already having spillover effects on the nation’s struggling housing market, which has been hammered by surging mortgage rates over the past year, according to industry experts.

The US economy was rattled this week as the implosions of Silicon Valley Bank, Signature Bank of New York and Silvergate Capital raised concerns about spreading contagion. Those fears were heightened Friday as investors observed trouble at two other banks – Credit Suisse and First Republic.

On the negative side, the banking sector’s problems could cause further damage to home prices in activity on the West Coast – where several cities’ markets were already considered “overheated” following a pandemic-era surge.

“Some buyers are canceling their contracts or bowing out of their home search because they work in tech and they’re worried about losing their jobs,” Bay Area Redfin manager Shelley Rocha said in a statement.

“The surge in tech layoffs was already causing jitters, and now the bank failures are adding to buyers’ nerves.”

At the same time, the bank industry’s struggles are likely to have a cooling effort on long-term mortgage rates, which had surged back above 7% by some measures as the Federal Reserve teed up more interest rates hikes.

“The Silicon Valley Bank failure, along with a few other banks, means that the Federal Reserve cannot be so aggressive in raising its short-term interest rates,” said Lawrence Yun, chief economist of the National Association of Realtors “Therefore, mortgage rates will decline.”

The average 30-year fixed mortgage rate fell to 6.6% for the week ending March 16, according to Freddie Mac data. Rates posted their first weekly decline in more than a month.

Signs of declining mortgage rates coincided with a small spike in buying activity. Mortgage purchase applications jumped 7% for the week ending March 10 compared to the previous week, according to data from the Mortgage Bankers Association – though they were still down 38% year-over-year.

“Buyers pounced when rates fell because they’re so volatile right now, which shows that there are plenty of people waiting in the wings for the right time to enter the market,” Redfin economics research lead Chen Zhao said in a blog post.

Even with a potential drop in mortgage rates, housing market activity is still at a relative standstill compared to last year. The average monthly mortgage payment for home buyers is still hovering near all-time highs at $2,556 – up 24% compared to one year ago, according to Redfin’s data.

The housing market will get its next sign about the path of mortgage rates at the conclusion of the Fed’s next meeting on March 22.

Investors are currently pricing in a 68.6% probability that the Fed will hike benchmark interest rates by a quarter percentage point and a 31.4% probability that they will pause increases, according to CME Group’s FedWatch tool.