One of the unexpected outcomes of the recent bank failures making headline news these past few days is there has been a “flight to safety” which for now, has had a positive impact on mortgage interest rates. Here’s what has unfolded so far.
The difference a week makes
Banking clients had been quite happy the beginning of last week with their favorite local lenders (otherwise known as regional banks) until word got out that maybe they weren’t as liquid in their ability to deliver cash as they were led to believe. True or not, the mere hint that maybe you might be the last one without a chair when the dominoes began falling, started a mass migration of withdrawals in excess of $250,000, the amount guaranteed by the little FDIC insured disclosure we’re so used to ignoring. Any bank that appeared too small or too weak to handle the withdrawals became suspect. The recipients of these new large cash deposits predominately was the top five U.S. banks (JP MorganChase, Citibank, Bank of American, US Bank, and Wells Fargo) and US treasuries, both of which were seen as the safest places to park cash.
Why would that impact interest rates?
As we’ve reported many times in the past, the 10-year Treasury yield and 30-year fixed mortgage rates are closely correlated. When the 10-year Treasury yield increases, it often (but not always) leads to an increase in 30-year fixed mortgage rates, and when the 10-year Treasury yield decreases, it usually leads to a decrease in 30-year fixed mortgage rates. Borrowers should pay close attention to these rates as they can have a significant impact on the cost of financing. The more money flooded into treasuries last week, the less the ‘yield’ or interest is paid and as a result interest rates, at least for now, have come down.
So, what are short-term effects of all this bank drama on the real estate market? One short-term silver lining is the bonds started making unprecedented moves. That means my clients who just went into contract in Lake Tahoe were able to lock a loan Monday .4 points lower than they were able to get on Friday with my favorite Bank of America lender. My best Citibank lender said yesterday his loans were back into the mid 5% range for a 30-year fixed loan and my favorite local Reno mortgage broker said that all of his loan products have come down a full half point as of today. It’s still higher than the lows of the year but any movement down is welcome!
As for mid and long-term effects, we just don’t know. It seems likely that as a result of the drama, lending standards are going to get more stringent, which means less options for buyers that don’t fit cookie-cutter qualifying guidelines, and possibly less lending all the way around. But it also may mean the Feds will realize they raised interest rates too quickly and that could be, after next week’s decision, the end of rate hikes for a while.
Stay tuned. For now, I’m just relieved my buyers got a break on their loan! As for mid and long-term effects, we just don’t know, the story is still unfolding. If you want to find out how this may affects your particular real estate situation, or you simply need a recommendation for a great lender that fits your particular needs, just ask—I only work with the best.