Since the collapse of Silicon Valley Bank on Mar. 10, a crisis of confidence in banks has rocked investors.
The question at the heart of this crisis is whether the Californian bank's troubles are the result of a brewing financial crisis, whose effects are still little felt or will be felt a little later.
This concern is not due to unfounded panic as investors often exhibit. It is a fear rooted in the fact that Silicon Valley Bank (SIVB) was the go-to institution for startups and many small businesses.
A priori, the bank did not take excessive risks until its bet on interest rates via an acquisition of treasury bonds and municipal bonds turned sour, when the Federal Reserve began to increase its benchmark rate. SVB then found itself with huge unrealized losses.
Real Estate Headache
A large number of experts and investors are convinced that other regional banks have made the same bet and are undoubtedly sitting on unrealized losses. As a result, the hunt for the next victim, after the Signature Bank in New York (SBNY) and the First Republic Bank (FRC) collapses, is underway. Investors are also trying to determine other problems which weaken the banks and could cause more losses. As with the 2008 crisis, their eyes are on real estate.
Many regional banks, said Ryan Nash, managing director of the financials group research at Goldman Sachs, have "exposure to high-risk commercial real estate areas, such as offices.”
Because property values have declined as office vacancies have increased in many cities across the US, many banks are expected to encounter challenges with their commercial real estate portfolios.
"A lot of real estate isn’t so good any more,” Charlie Munger, vice chairman of Berkshire Hathaway (BRK.B), recently warned. "We have a lot of troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties. There’s a lot of agony out there.”
It is not just commercial real estate that is a threat to the economy, says Elon Musk, CEO of Tesla (TSLA) and founder of SpaceX. According to the serial entrepreneur, residential real estate is also overheating. The bubble has not burst yet, because the job market remains strong for now, but he fears that this calm may not last. This is apparent from an exchange he had in a recent thread on Twitter.
'Tragically Accurate'
"The mortgage payment needed to buy the median priced home for sale in the US has moved up to $2,566, a new all-time high,” tweeted market expert Charlie Bilello, with a graph of data from Redfin to back his claim.
"WHY ISN’T IT CRASHING,” asked Billy Markus, the co-founder of the Dogecoin cryptocurrency, of which Musk is the biggest influencer.
"Existing people in houses can't afford to sell— existing being renting can't afford to buy,” Chen Fang, Chief Operating Officer of BitGo, a digital asset trust company and security company, replied. "We are stuck in this limbo until the job market crashes and existing people with houses are forced to default on their mortgages sending the real estate market into the next death spiral 🌀”
This is where Musk stepped in to validate this analysis, going so far as to add a complete doom prophecy.
"Tragically accurate,” the billionaire, who has become the face of today’s American capitalism, concluded.
Basically, we have to be prepared for a deterioration in residential real estate as well.
One of the negative effects of the banking crisis of confidence is that it has pushed banks to turn off the credit tap. It is more and more difficult to obtain a mortgage, because the banks, which want to preserve their liquidity, have added more strict criteria to grant the credit.
Between this and the interest rates that have been rising due to the Fed's monetary policy for over a year, credit has become expensive. Households thus find themselves with monthly payments that have increased sharply.
