How US banks turmoil is impacting the already hammered housing market

The turmoil in the US banking sector is already having an impact on the country’s struggling housing market, which has been hit by a surge in mortgage rates over the past year, according to industry experts.

The US economy was rocked this week by the explosions at Silicon Valley Bank, Signature Bank of New York and Silvergate Capital, raising concerns about the spread of the contagion. Those fears were amplified on Friday as investors watched for trouble at two other banks — Credit Suisse and First Republic.

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On the downside, banking sector problems could further hurt house prices in activity on the West Coast – where many cities’ markets were already deemed “overheated” after a pandemic-era surge.

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

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

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At the same time, the bank industry’s struggles are likely to result in a cooling effort on long-term mortgage rates, which by some measures were back above 7% as the Federal Reserve hiked interest rates more.

“The failure of Silicon Valley Bank, along with a few other banks, means the Federal Reserve may not be so aggressive in raising its short-term interest rates,” Lawrence Yun said, 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 data from Freddie Mac.

Rates posted their first weekly decline in more than a month.

Signs of declining mortgage rates have coincided with a small increase 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 jumped in when rates fell because they are very volatile right now, which shows that many people are waiting for the right time to enter the market,” said Chen Zhao, Redfin Economics research lead. said in a blog post.

Even with a possible drop in mortgage rates, housing market activity is still at a relative standstill compared to the past year.

According to Redfin data, the average monthly mortgage payment for home buyers is still hovering near an all-time high of $2,556 – up 24% from a year ago.

The housing market will get its next signal 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% chance that the Fed will hold benchmark interest rates a quarter percentage point and a 31.4% chance, according to CME Group’s FedWatch tool.