Banking Armageddon not envisioned after banks' collapse

The dust has yet to settle following the recent collapse of two banks – Silicon Valley Bank in California that failed on March 10 followed by Signature Bank in New York two days later – earlier this month. Yet pundits are warning against painting the failures with too broad a stroke in assessing the strength of the banking industry as a whole.

But there’s a disclaimer, and it’s a big one: It’s too early to tell.

Kimberly Jay, a broker at Compass, noted the differences among various US markets in positing that the impact won’t be a wholesale one. “Real estate is local,” she told Mortgage Professional America during a telephone interview. “Not all markets perform the same way.”

What were the effects of the banking crisis?

As such, she cautions against focusing solely on blaring headlines detailing isolated bank failures: “Whenever these articles are written, I think this should be stressed because the Manhattan market isn’t the same as the suburban market, it’s not the same as Florida, LA, Kansas City, etc. Let’s start off with that.” Manhattan, for one, has a higher price point than most other markets, she noted.

The impact on the real estate market? Well, that’s a different story, she added: “It’s a little early to tell how it will really affect the real estate market for buyers and sellers,” she said, noting the shakeout won’t be known in the brief span of time since the banks’ collapse.

“Last week, we had 9% more contracts signed than we had the week before. As a buyer, you’re normally fairly certain and you plan ahead at least three months ahead of time that this is the right time for you as an individual. The contracts that were signed last week – those decisions likely were not made last week. You don’t just say ‘let’s go buy a place, get approved and buy a property in a week.’ It doesn’t work like that. There’s a longer lead time.”

What’s certain is that there will be a tightening of credit after the Fed raised the interest rate again on Wednesday, this time by 25 basis points. “According to [Federal Reserve Chairman Jerome] Powell when he spoke when he raised rates, he did talk about how the banking situation will have a tightening effect for credit,” Jay said.

But Powell also was unsure what impact the banking crisis might have in the longer term: “It’s too early to say, really, whether these events have had much of an effect,” he said at a news conference following his rate hike. He did acknowledge, however, the availability of credit and standards toward securing it will be contingent on how long the baking turmoil continues.

What is a contagion effect in banking?  

Lee Smith, senior executive vice president and president of mortgage at Flagstar Bank, also doesn’t envision a banking Armageddon as the result of the pair of bank failures in California and New York earlier this month. But he expected more robust talk about the banking scenario than Powell offered.

“I expected – and think the market expected – the Fed to  raise rates 25 basis points yesterday,” he said during a phone interview on Thursday. “All the attention was really going to be on what Chairman Powell said after the meeting. Prior to the meeting, my expectation – given what some of the things we’re seeing in the banking industry – would be that the Fed would come out and raise rates by 25 basis points because they’re still finding very stubborn inflation.”

Yet he expected the recent events in the banking industry to loom larger than they did, with some mention of the unemployment figures for added measure. “But then given some of the events in the last couple of weeks, I expected the Fed to say, ‘and now we’re going to pause for three months to wait for the data to catch up with the actions.’

“Because as we know, there’s always a lag between the actions and the data. I think we’re seeing some of that.  Because we know companies in a lot of industries are focused on costs and cutting costs, but we’re not necessarily seeing that in the unemployment numbers right now, but I think we will in time.”

How has inflation affected the US economy?

The main focus, it appears, is to tame inflation: “What was interesting is Chairman Powell after the meeting said we are still focused on getting inflation under control. It’s likely there will be additional increases. He indicated it’s unlikely they’re going to start reducing rates in 2023, and right now the market has got three rate decreases before the end of the year.

What’s interesting thing for me right now is there’s a disconnect between the market and what we’re hearing from the Fed and the chairman. Things are only going to stabilize when everybody is closer to being on the same page, and they’re not at the moment. The Fed is very focused on getting inflation to that 2%, and it’s going to use the tools it has at its disposal – the main one is short term rates.

“The Fed obviously believes what is happening in the banking industry is contained, it’s idiosyncratic, and not systemic. So given the actions it’s currently taking, they don’t believe it’s going to have a contagion effect. Having said that, I think they are watching what has happened and I do think they’re going to slow the rate of their increases down versus what they were doing in 2021.”

For his part, he’s waiting for the data to catch up with the actions: “I do think we’re at a point where the data is lagged, and I do think that as we get toward the middle of the year, you’re going to see the data catch up, you’re going to see the CPI [consumer price index] numbers start to come down.

“You’re going to see unemployment increase because there are a lot of companies in ’23 that focused on cost structures, and at some point that’s going to have an impact. And with everything that happened in the banking industry, it’s probably going to have an impact on credit availability at some point. I think the Fed is also banking on that having a positive impact on inflation as well as the actions they’re taking.”

Yet ultimately, there is one certainty: Only time will tell.