Unless you have been living under a rock, you know that the Federal Funds Rate has been increasing dramatically over the past year, forging the fight against inflation.  The Federal Reserve continues to study data (economy strength, employment numbers, inflation in various sectors, etc.) to determine if they need to hold steady with the rate, increase it slightly, or increase it more to continue the fight. Recent news is now showing that the increased rates are starting to have a negative effect on the banking sector with 3 bank failures in the United States and trouble brewing at Credit Suisse in Europe. The news this week is scary, but can it be good news?

Bank failures are terrible. When consumer faith in the banking system starts to wane, the ramifications for the economy are widespread. Consumers and businesses begin to rethink where and how they keep money, and some scramble to make a run on deposits, which happened with Silicon Valley Bank in California last weekend. 

https://www.nytimes.com/article/svb-silicon-valley-bank-collapse-timeline.html

In short, Silicon Valley Bank (SVB) had a bulk of their investments in US Treasuries, arguably the best safe haven possible. However, the bulk of their US Treasuries were purchased in the low interest rate era, and were yielding something like 1%. Fast forward to today when US Treasuries are yielding between 3.5% and 4.63% depending upon the term. This recent increased yield values a US Treasury yielding 1% much lower, and a 1% Treasury has to be sold at a significant discount. As per the article above, "Silicon Valley Bank concerned investors when it said it needed to shore up its balance sheet and raise $2 billion in capital. It was forced to sell a bond portfolio at a $1.8 billion loss." Hence, a run on the bank began and the Federal Regulators had to step in and take over.

Credit Suisse, a bank with $755 Billion in assets, has had a variety of troubles the last few years. These troubles have compounded into this week of uncertainty and they announced they needed to raise capital quickly. Several investors declined to prop it up (Saudi) and the Swiss Government stepped in yesterday to lend the bank $54 Billion.

Below is an article from Yahoo Finance discussing the recent Credit Suisse Bank liquidity issues:

https://finance.yahoo.com/news/how-credit-suisse-just-unleashed-a-nightmare-decision-for-the-fed-and-the-ecb-093016411.html

An interesting excerpt from this article regarding the Fed's conundrum for next week's meeting:

"If the Fed doesn't move (doesn't raise rates), it risks damaging its hard-won inflation-fighting credibility in the middle of the battle. If the Fed hikes (raises rates), it could exacerbate the worsening credit market conditions, contaminating the "productive" areas of the economy. At least (Chairman) Powell has another week to digest the developing situations both domestically and abroad…."

This all really is not good news, but it is part of the "fallout" of higher rates and a tightening money supply. By making it harder to do business, the more risky financial positions will begin rising to the surface and in turn slowing down, or at least being a speed bump to the economy. Most likely, there will be more negative news in the business world in the next few weeks or months which may be signaling that the interest rate hikes are accomplishing what the Federal Reserve has intended to do. The "good" side of this for the real estate world is summarized in this article about mortgage rates:

https://www.housingwire.com/articles/mortgage-rates-declined-amid-banks-failures-whats-next/

Excerpts from this article hit us close to home:

"Mortgage rates are down following an increase of more than half a percentage point over five consecutive weeks," Sam Khater, Freddie Mac's chief economist, said in a statement. "Turbulence in the financial markets is putting significant downward pressure on rates, which should benefit borrowers in the short term."

And:

"February's employment and inflation data both pointed to a still-hot, though slowly cooling, economy. All else being equal, this would likely mean a more aggressive rate hike at next week's FOMC meeting," Hannah Jones, economic research analyst at Realtor.com, said in a statement. "However, in light of last week's bank failures, the committee may choose to remain conservative to ensure stability in the economy."

And:

"Nik Shah, CEO at Home.LLC., explains that mortgage rates are tailing the treasury yields in the short term. Investors flock to safer assets amid fears brought by bank collapses, and the 10-year Treasury note fell from nearly 4% at the start of last week to 3.4% by mid-week. With mortgage rates dropping, "housing affordability is improving and supporting home prices," Shah said….."As inflation rose 0.4% month-on-month in February, the Federal Reserve will keep increasing rates, albeit slowly," Shah said. "Housing contributes to 45% of inflation, a share that has grown for months. So the Fed is keen on demand destruction to cool the housing market down"  Meanwhile, when rate hikes cease in the long term, demand will rapidly increase, but the housing supply is still near an all-time low. Then, "home prices will skyrocket," Shah said. "

So if you were the Federal Reserve, would you hold steady, raise .25, or raise .50 next week?  I have no clue, but you can imagine that they know that further large rate hikes will exacerbate the current economic outlook increasing the chance for more failures, and quickly slowing down the economy (HARD LANDING).  A small increase of .25 basis points may send a message that it is a cop out, but also signaling there is more inflation fighting ahead.  No increase will send a narrative that we may be close to being finished fighting inflation, or that the Federal Reserve is worried about the banking sector although they say the opposite.   

It is important for us as real estate professionals to keep abreast of the market news.  We cannot predict the direction we are heading, but we at least need to know the current interest-rate atmosphere.  I don't know about you, but I'm asked frequently about the market and rates, and am in several conversations each day with interest rates as a major theme.  Fortunately, we can send our customers and clients some news articles and let them figure it out. We need to continue educating ourselves on the market and serve our clients' best interests. We are the source of information for them, but not their soothsayer. Let the Federal Reserve do the other heavy lifting for us.

Sorry for so many quotes and articles in this Broker Bit, but the professionals can explain it a lot better than I can. Hopefully we are getting close to knowing which direction we will be heading. Higher rates are definitely slowing down our real estate business, at least temporarily. Even if rates go higher from here, it will get us closer to a pause, and hopefully a decrease soon. Just think what our business will be like when rates begin to decline, especially with our still very-low housing supply!