Does Silicon Valley Bank’s Demise Spell Trouble for Real Estate?
March 15, 2023
Silicon Valley Bank was not involved in the residential mortgage lending. Nor did they invest any significant funds in the real estate industry. But the stunning and breathtakingly swift demise of this iconic local bank last week will likely have repercussions that will be felt in the local real estate industry, both residential and commercial. The impact may not be felt right away, but you can bet it will be noticed.
Why? Here are the three key areas where I believe you will see the impact:
1: The Loss of Creative Funding.
Silicon Valley Bank was renowned for its non-traditional lending methods as much as it was known for its penchant for investing in tech, life science, and other industries that were often eschewed by traditional institutions. Consequently, many of the local tech and bio-tech startups have existing business loans with SVB, or use them for a variety of banking functions. The problem now is that these companies may have to source these funds from other banks who will likely not extend the same generous terms that SVB did. For some start-ups that are already battling higher interest rates and a slowing economy, this could spell deep trouble.
A significant percentage of home owners and potential buyers in our area come from the tech and bio-tech arenas. If the net result of this bank implosion is the loss of jobs, or worse yet, the failure of local companies, that will not have a positive impact on the real estate market.
2: Rethinking Rate Hikes.
It's widely accepted that the rapid interest rate hikes initiated by the Federal Reserve in order to combat inflation likely played a significant role in the events that led to the rapid demise of Silicon Valley Bank. Until last week, it was believed that the Fed was going to raise their rate again in the March 22 meeting another 25 basis points, a move that has been widely anticipated and already baked into the current mortgage rates. But after SVB was placed into receivership last week, that upcoming rate hike seems to be in question.
Depending on which side of the aisle you align with, you'll either hear calls to freeze or reduce future rate hikes in order to prevent more potential carnage in the banking industry, or you'll hear a directive to move forward with the planned hikes. It's probably too early to tell if the Fed will change their pre-planned course, but you can get your last deposit that the failures at SVB and Signature Bank in New York will play a significant role in the Fed's next meeting.
3: Another Hit to Consumer Confidence.
There probably are very few events that can kill a consumer's confidence in the economy more than watching a prominent bank literally implode on itself in less than 2 days. I can only imagine that “FDIC” was probably the most searched term on Google the past few days, as previously content investors suddenly wake up and realize that a significant portion of their investments is not insured from a situation like what happened with SVB. Even the most remote specter of trouble caused bank valuations to plummet — First Republic Bank, for example, lost over 60% of its value in just one day.
Why is this important? When consumers are not confident with the economy, they typically shrink spending on things that are not essential — like upgrading their living situation. There has already been enough stress from the continual layoffs of high-tech workers. This latest curve ball is certainly going to spook some already jittery investors.
Whatever happens as a result of this bank failure (and any subsequent ones), I don't think you'll sense an immediate impact. This is the kind of change that will work its way systemically through our industry over a number of months. But regardless, it's a real threat and it's worth keeping an eye on.
I'd love to hear your thoughts in the comment section below.