The Connection Between Banking and Real Estate in 2023

Throughout the years that I have written this blog, I have regularly connected the activity of the financial market with the real estate market. In doing so, I often take for granted the connection between the two markets. Recent troubles in local banking, however, give me yet another occasion to highlight how the banking industry impacts the real estate market. It seems like every few years, I write an article like this, but I will do my best to highlight the contextual factors that make this year’s bank failures unique.

Dubbed the “mini-banking crisis of 2023,” the recent bank failures of Silicon Valley Bank, First Republic Bank and Signature Bank have made headlines in the past few weeks. All of these banks were located in populous states, with Silicon Valley and First Republic being California banks and Signature being a New York bank. The first domino to fall was Silicon Valley Bank, whose portfolio of treasuries and mortgage assets took a large hit in value, due to the Federal Reserve's continual raising of the interest rate. As explained in an article written last month in Fortune Recommends, the Fed has consistently raised interest rates since March of 2022, in order to bring inflation back to 2%. This move by the Fed has rendered many investments yielding lower interest rates that were previously desirable less valuable.

Although Silicon had yet to realize any real losses on its portfolio prior to its closure, the news of the loss in value of its assets caused customers to request their deposits en masse, leading to a run on the bank. Fear of a similar situation led the Fed to preemptively close Signature Bank, as well, and eventually First Republic. A brief summary of this situation is given in a May 1, 2023 Business Insider article that can be found here. These banks together held 2.4% of all banking assets and were local banks, so their recent closures are by no means a signal of the collapse of our banking system. The "mini-crisis," however, is a justification for banks to be more skittish about lending, particularly real estate lending, and an invitation for investors to demand discounted prices before loans are purchased on the secondary market. The long and short of it is that real estate lending is likely going to be more scarce and expensive going forward.

This new environment of rising interest rates and recently failed banks, however, can be good news for those who are able to purchase. This is because real estate and mortgage loans are going to be more available, as buyers who can no longer find loans or credit to purchase will exit the market. Additionally, the unpurchased, unacquired or off-loaded residual assets of the failed institutions will soon hit real estate markets, depressing prices and causing banks to be more amenable to restructuring. Under such conditions, an investor, armed with cash, who properly targets assets in the market could do very well.

The banking and lending markets are intimately tied to the real estate market, because money, through lending, acts as a lubricant for real estate assets. More properties, land, mortgages, options and even liens can be acquired when more loans are available. In a market, like this one, in which loans are becoming more expensive, assets bought by cash tend to be cheaper, while retaining much of their long-term value and upside. Given their connection, successfully navigating these two markets can yield increased portfolios and increased wealth.