The collapse of Silicon Valley Bank on March 10, 2023, kicked off a turbulent time in the financial sector. Within a week, Signature Bank was seized by regulators in an attempt to prevent a domino effect, the US Federal Reserve set up an emergency lending program for banks, and regional bank stocks plummeted. The activity even prompted President Joe Biden to reassure tax payers that they would not be called upon to foot the bill for bank bailouts.
The SVB-inspired financial turmoil has left real estate agents wondering how — if it all — the real estate market will be affected. A key question is whether the market will be more attractive to investors in the wake of the SVB failure. That question is difficult to answer without knowing just how much fallout there will be.
If SVB turns out to be the first of a dozen banks that fail over the next several months, average home buyers will start to panic, stop house hunting, and sit on their assets. In that case, real estate prices will drop, providing investors with a great opportunity to pick up real estate at discounted prices. As British financier Nathan Rothschild said, “The time to buy is when there’s blood in the streets.” Whether that will happen remains to be seen.
What we do know is that SVB has not had an impact on rising interest rates. Speculation in mid-March that the SVB collapse could keep the Federal Reserve from raising rates proved to be wrong. The rate climbed to 5 percent on March 22, 2023, marking a 4.5 percent increase during the past 12 months.
As rates continue to climb, sellers must lower prices to allow the capitalization rate necessary for securing a mortgage. For a real estate investor, that is good news. Recent stats shared by The Dallas Morning News show that nearly 30% of single-family homes sold in the Dallas-Fort Worth (DFW) area in 2022 were bought by investors. It also said most investors were not big Wall Street firms. That means approximately one out of every three DFW buyers was a local investor.
The behavior of investors in DFW is not limited to that market. Stats shared by Pew Charitable Trusts in July 2022 showed nearly 25% of all single-family homes sold across the US in 2021 were purchased by investors. In Georgia and Arizona, more than 30% of single-family home sales went to investors. In California and Texas, 29% of homes were purchased by investors.
Real estate agents who want to capitalize on the stirrings in the market should reach out to investors, as well as those looking to become owner/occupants. They should tell potential investors that interest rates are driving prices down while rents continue to go up. The high interest rates could mean investors will only make $200 to $300 per month when renting a single-family home. However, those rates are expected to come down next year. By refinancing at a lower rate when rates decline, the monthly return on the property can increase to $500 to $600 per month.
Should the SVB debacle trigger a real estate collapse, those focused on investing in rental properties would welcome it. An income-producing asset — like a rental property — delivers in both an up market and a down market. The equity that an investor has in the home may decline, but the rental income won’t.
Smart investors also know that buying rental properties in a down time sends their rate of return through the roof. If the collapse of SVB leads to a huge crash, real estate investors stand to make millions of dollars over the next five to seven years.
How should real estate agents prepare for the possibility of a huge crash? They should double and triple their efforts to get on investors’ lists. Then, when the market goes south, they will be ready to connect with those investors, reminding them that houses are selling for 30-40% less than they will sell for when the market recovers. Smart real estate investors will be quick to pick up those calls.