What the Silicon Valley Bank Collapse Means for Real Estate

What a week for banking! As you may have heard, late last week Silicon Valley Bank collapsed and was taken over by the FDIC.

Let’s talk about how this happened in the first place, what’s happened since then, and how this affects real estate. 

So what happened with Silicon Valley Bank (SVB)?  

Here’s the Simplest Version Possible…

• When you put money into a bank, they don’t actually hold the majority of the money, but lend it to other customers or invest it in mortgages, small business loans, US Treasuries, etc.) to earn income.

• In fact, for every $100 we deposit into banks, banks are only required to hold about $10 on hand to spit out of ATMs, give cash at the window, or transfer between accounts.

• SVB provided banking services for a significant number of tech start-ups and established tech firms and when a few prominent members of this community suggested companies remove their cash from SVB, it caused a classic ‘run on the bank’.

• That means that more customers were requesting cash than the bank had on hand.

• So to raise cash and handle the customer demands, SVB was forced to sell $21 billion of their investments. 

• The problem was these investments had become less valuable than when they were purchased and were sold at a huge ~$2 billion loss. When this became public, more customers started requesting their cash. 

• As this unfolded (all within just a matter of 48 hours), the FDIC (government) eventually stepped in, took over the bank to stop the run, and try to find a solution.

Here’s what happened since then

• The Federal Reserve stepped in Sunday night and created a massive backstop for every bank in the country that could run into a similar issue. This should essentially eliminate the possibility of any additional significant bank failures.

• But this could lead to many banks slowing down their portfolio lending to increase their cash reserves.

• Biden stated no losses would burden taxpayers — one of the key differences between last week’s collapse and 2008. 

• Many questions are still lingering, but one thing is certain: world markets will experience volatility in the coming weeks. 

And this is worth mentioning: there was no known fraud or anything malicious at SVB. 

In fact, they had invested most of their money into fully guaranteed US Treasuries and Mortgage-Backed Securities. 

The issue was, as rates went up, they didn’t reduce their already industry-high percentage of holdings or hedge them, but simply held onto those US Treasuries and Mortgage-Backed Securities.  

When rates go up, like they have all year, the market value (what you can actually sell these for) goes down equally as fast as the rates go up.  This isn’t normally an issue for banks that can hold the securities and collect interest payments, it’s only an issue when you must sell them like in the case of SVB.

SVB reopened Monday, March 13th, giving all insured depositors full access to their insured deposits, while uninsured depositors will be paid an advance dividend within the next week. 

What does this mean for real estate?

We can expect mortgage rates to drop even more this week. Last Friday, the US Treasury Yield quickly dropped in response to the SVB news. In turn, mortgage rates declined almost a quarter a percent, bringing 30-year fixed rates to 6.76% end of the week. 

As rates continue to fall, we could be back to 6% mortgage rates this week. So if you’ve been waiting to lock in your rate, here’s your chance. 

Sellers, this might also mean it’s time to act quickly and get your property in escrow.

The lower rates combined with pent-up buyer demand means more opportunities for you. 

If you’d like to discuss your options during this window of opportunity, reach out to me today.