The collapse of Silicon Valley Bank (SVB), a Santa Clara-headquartered lender which had established itself as the tech sector’s favorite, is likely to shake up one of the country’s most expensive housing markets, experts say—California.
Oscar Wei, deputy chief economist at the California Association of Realtors, told Newsweek that the same bank failures that have spread fears of contagion to the wider banking sector last week “could actually help the housing market slightly because of interest rates being a little lower” in the upcoming months.
The Federal Reserve had previously signaled its intention to hike rates by 50 basis points, with Chair Jerome Powell warning at the beginning of the month that rates will likely be “higher than previously anticipated.” But that was before the meltdown of SVB and all the chaos that followed as authorities tried to contain the damage and avoid widespread panic among investors.
Amid the current uncertainty surrounding the banking sector, Wei and most experts expect that the Fed will only raise interest rates by 25 basis points, if at all—leading to a cooling of mortgage rates. This could end up helping sales in the California housing market in the upcoming months, Wei told Newsweek.
Sales in California—one of the states with the most expensive home prices in the country—have dropped significantly in the past year, having plunged 42.8 percent in January from January 2022.
California has also seen some of the steepest home price drops in the country since mid-2022, when most experts announced that the U.S. housing market was moving towards a significant correction after over two years of boom. That’s partly because home prices in the state have been some of the most unaffordable in the entire country. The median single-family home price is currently around $750,000, more than twice the national average median.
Partly, that’s also because California’s housing market has been directly impacted by the crisis that hit the tech industry after the pandemic, when their booming revenues started slowing down and even the country’s tech giants announced mass layoffs.
“In the Bay Area, we typically have more people who hold onto tech stocks compared to other parts of the country, partly because when you work in a tech company you get issued stock options and things like that,” Wei said. “So when tech stock prices go down, people feel less wealthy. And so they’re less likely to offer a higher price than they used to when they buy a home.”
In the Bay Area, Wei said that home prices have been dropping a little faster compared to other areas in Southern California or the Central Valley, “and that’s partly because of the tech stocks’ impact.”
In January, the median sale price in the Bay Area was $1 million, down 35 percent from the peak of $1.54 million in April 2022, according to the California Association of Realtors. But the free fall of California’s home prices might be halted—or decelerated—by the collapse of SVB.
“As we move into the spring home buying season [between March and May], it looks like the cost of borrowing will be a little bit more affordable compared to say two, three weeks ago,” Wei said. The California economist thinks that home prices—which have been plunging deeper than in most other U.S. states in California these past few months—might finally reach rock bottom and go back up.
“My belief is that in the next couple of months, in March or April, we may actually see the bottom of prices, of the median price. So the median price might reach the bottom for the state in the next couple of months, and then it will start coming back up,” Wei said.
This, Wei specifies, is if the bank failures of last week won’t spread to the wider banking system. “If things get out of hand, then it will be a little different. I think home prices could actually go back down a little further in that case,” Wei said. At the moment, the California Association of Realtors still thinks that the crisis will be contained.
But while this might be good news for homebuyers and sellers, the meltdown of SVB is also expected to profoundly impact the construction of affordable housing in the state. Bloomberg reported that SVB was a key lender for funding affordable housing projects in California, having put more than $2 billion into investments and loans in the Bay Area over the past 20 years.
The implosion of the bank is now likely to disrupt and delay these projects.