Bank Runs & Lower Mortgage Rates 3/14/2023

“Those that fail to learn from history are doomed to repeat it.” 

Winston Churchill

Humans are incapable of making a decision without emotion. This was found when studying people who had lost the ability to feel emotions. They are unable to make choices. Fear and panic insight action. That is how on a non-descript Thursday, one bank could lose $42B in deposits. A bank run that took down 40-year-old Silicon Valley Bank (SVB) in one day.

Bank Run

It was a typical bank run on an unusual bank. And it was a perfect storm of shrinking deposits and dwindling new capital. SVB catered to Silicon Valley start ups, private companies, many with billion dollar status, with huge amounts of capital flowing in and out of the bank. However, when venture capital funding dried up as the tech sector lost value, the companies burned their cash reserves. Less investment and lower deposits.

The bank’s doors were shuttered on Friday. Signature Bank, heavy into crypto went down on Sunday. And by Monday the FDIC had guaranteed all depositors all of their deposits, meaning everything was guaranteed, not just the first $250,000 in deposits.

The banks themselves were not saved, but their customers were. Many may criticize the decision to bail out the tech start up sector, but it wasn’t for the billionaires, it was for their employees. If a company’s deposits vanish, making payroll gets complicated. Without the ability to make payroll, there is no company.

The FDIC’s decision to completely cover the deposits goes further than that. Remember the emotional humans? They just heard that a bank went down and panicked without understanding why. The panic could lead to more bank runs. Preventing a bank run is hands down, the top priority.

So far so good, the FDIC’s 100% guarantee calmed the panic. This is important because banks are fundamentally vulnerable. Revenue is generated by interest paid on loans so by nature, banks lend out more than they keep on hand. A bank run always has the ability to take down a bank. If the panic spreads to all of the banks, the entire financial system breaks.

A financial crisis is different from a recession.

If you look at the history of recessions, they are always caused by a certain sector and usually are not a total financial crisis. The stock market crash and the run on the banks in 1929 pushed the US into a complete financial meltdown and caused the Great Depression. It essentially took WWII to pull us out. (the New Deal helped but it was really the war)

The Great Recession in 2008 created a financial crisis. It was a giant mess of fraud and greed and was started by the repeal of the Glass Steagall Act in 1999. It was enacted in 1933 and it prevented commercial banks from investing in each other. The banks bought each other’s bad loans and repackaged and resold them and everything crumbled because of the mortgage fraud with appraisers, truly a perfect storm that will never be able to happen again, at least not exactly the same. As Wall Street crumbled the Fed bailed out the banks which prevented a bank run that would have pushed the Great Recession into the second Great Depression.

Good News!

Let’s learn from this. Let’s help reduce the panic by giving clear information. And if you made it through my history lesson, you get to hear the good news. The banking chaos pushed bond rates up and mortgage rates down, by about half of percent, back below 7%!

And there is pressure on the Fed to slow their rate hikes. The expected 50 basis point hike later this month maybe only 25 basis points. Some have called for no hikes this month. That is unlikely given another hot job market report and continued inflation. The lower Fed rate hike could lead to lower mortgage rates.

This is very likely a short term thing. Once the dust settles after these bank closures, the Fed will refocus on fighting inflation and further rate hikes will come.

Buyers should take advantage of the current rates, it is unlikely they will last more than a few weeks.

Purchase contracts are up, especially as rates have fallen.

Meanwhile, new listings continue to shrink and the overall available listings also continue to dwindle.

In perfect, consistent order, the laws of supply and demand kick in. Prices are starting to increase. They are not increasing at the speeds we saw last year, which is a very good thing. Today’s buyers have their limits and they are holding to them. Today’s sellers are more flexible because they have to be.

Final Thoughts

Since we are all human, let’s help each other make the best, most rational choices possible. It is a good time to buy a house. And no more bank runs.

Check it out! I was recently quoted in the Phoenix Business Journal. Angela Gonzales’ article gives a great update on MV Realty pausing business in Arizona.

Copyright Sarah Perkins 2023