With all eyes on the recent collapse of Silicon Valley Bank (SVB) for an incredible $209 billion, some wonder how and when the bank failure may impact the housing market, particularly the California market.
In terms of raw size, the SVB failure ranks second on the list of all-time biggest bank failures. Only the 2008 collapse of Washington Mutual was more significant at $307 billion. Just a few days after the SVB collapse, Signature Bank of New York failed, too, with $118 billion in assets in play, making it the third-largest bank failure of all time.
However, these record-setting bank failures aren’t the only factors influencing the health of the economy and real estate activity in California. Interest rate hikes by the Federal Reserve have already put a damper on real estate activity nationwide. The Fed just announced its ninth consecutive rate hike in its effort to control inflation.
Will the combined influences of interest rate hikes and economic uncertainty cause further disruption to the California housing market?
Home Sales Activity: Where We’ve Been & Where We’re Going
In 2022, California saw home prices fall by a very modest 4.2 percent from December 2021 to December 2022, according to figures published by Bankrate. Home values experienced incredible growth during the COVID-19 pandemic, particularly in California, and the slight market correction wasn’t surprising.
A trio of factors: inflation, interest rate hikes, and economic uncertainty, caused the slowdown in 2022 in California’s housing market, but the effects on home values weren’t as dramatic as some real estate soothsayers predicted. Continuing rate hikes by the Federal Reserve suggest the market may continue to slow throughout 2023.
However, the most eye-catching impact of the rate hikes in 2022 wasn’t home values. For the most part, it was the drop in overall sales volume.
In its most recently published figures, the National Association of Realtors (NAR) showed a 26.8 percent drop in sales volume in February 2023 versus February 2022 for homes selling for $500,000 to $750,000. According to Zillow, the average price of a home in California is just over $700,000. Sales volume was down in all price ranges in California except homes selling for less than $100,000.
Will the California Housing Market Collapse in 2023?
Despite the slowdown in sales activity, very few industry insiders and economists are sounding the alarm about an impending housing collapse in California, although the Bay Area remains an outlier in California. An article from Forbes indicates that inventory remains low, and despite higher interest rates, home values aren’t falling off a cliff. Buyers are simply putting their home-buying plans on hold for the moment.
Where predictions get complicated is with the recent bank failures. Will the collapse of SVB and Signature Bank throw a wrench into a fragile real estate economy? How might the increase in economic uncertainty impact real estate activity in California?
According to an economist interviewed by Newsweek, a contributing factor in California’s real estate market slowdown is the health of the tech sector, particularly in the Bay Area. Those who work in the tech sector often hold stock in the companies they work for, and when those companies experience layoffs, and their stock prices tumble, those employees (and former employees) see their net worth fall, too.
Overall, it makes sense that prices have dropped in the Bay Area more swiftly than in other locations like Southern California or Central California. Further information recently published by Newsweek indicates a rather substantial drop in home prices in the Bay Area from $1.54 million in April 2022 to $2 million in March 2023.
Will the rest of the state follow the dramatic market changes in the Bay Area, or will California bottom out regarding home values and sales volume?
The real estate market’s stability likely depends on whether the recent bank failures lead to widespread or catastrophic failures of other banks. As reported by CBS, recent testimony to Congress by Treasury Secretary Janet Yellen indicates the federal government is focused on stabilizing the banking system in the United States.
Long-Term Effects of Bank Failures on Real Estate
Even if the housing market doesn’t experience any additional volatility related to the bank collapses, California may still see some problems worsen. Silicon Valley Bank invested more than $2 billion in affordable housing throughout California when it was active.
The bank’s failure may have lasting effects on the state’s ability to build affordable housing in an era when buying a home remains out of reach for most California residents. Recent data from the California Association of Realtors indicates that only 17 percent of California households could afford to buy a median-priced home in the state by the end of 2022.
While these figures aren’t encouraging, what does all this data mean? Bank failures, interest rate hikes, and economic volatility may seem like significant barriers to a healthy real estate market. Still, industry experts don’t expect a sudden or severe market correction, with the most volatile changes occurring in the Bay Area. Buyers and sellers should see some additional slowdowns in 2023 but those market corrections won’t be substantial.
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