How will recent banking turmoil impact Sarasota-Manatee real estate market?
Approximately three weeks ago, the financial markets were stunned by the seemingly overnight collapse of Silicon Valley Bank. Initially, pundits speculated this was an isolated event due to an overconcentration on the tech sector as well as poor treasury management. The ensuing weeks revealed a larger problem with additional bank failures leading the Federal Reserve to react swiftly to solidify the confidence in the overall banking system.
For the local housing market, however, home sales activity has steadily increased since the beginning of the year and (so far) has not been derailed by the recent banking turmoil.
The real estate market in 2022 was a tale of two halves. The first half of the year carried over the frantic pace of the previous two years. Whereas the second half of the year saw that momentum grind to a halt when the Federal Reserve began its aggressive rate hikes resulting in a more than doubling of the interest rate from June forward. As you keep this in perspective, the next few months of sales activity will appear dramatically low (20-30% off of 2022 year over year), when in reality we are seeing a healthy level of real estate activity. In fact, February showed almost identical levels of new pending sales as the same period in 2022 (prior to the jump in interest rates). This same level of strong pending sales activity has continued through this March, in spite of the turbulence in the financial markets.
There are two counterbalancing forces at play that will determine the banking turmoil’s impact on local real estate activity in the coming months. On the one hand, the recent indication from the Federal Reserve that it may soon cease its steady rate increases has had a positive influence toward reducing the interest rate for borrowing money. In fact, just two days before the SVB collapse, interest rates hit a 2023 high of 6.84% and have since retreated to around 6.36%. Any decrease in borrowing costs are a welcome relief to buyers struggling with housing affordability. The projections are that these rates will continue to fall and should continue to stimulate demand from some homebuyers still on the fence due to the recent higher interest rates.
Even prior to the beginning of the recent banking turmoil, many banks around the country, and some regional banks locally, had already begun to ease their appetite for portfolio lending products such as jumbo loans and construction loans. The additional stress from the current banking environment, and the Federal Reserve’s reaction to this stress, will likely further constrain the availability of credit – particularly for those portfolio products previously mentioned. While this is a concern, it is important to remember that our local real estate market benefits from a high percentage of cash buyers along all price points (approximately 50%), which provides some insulation locally to these macroeconomic factors.
One area where the constriction of credit availability could be felt locally is in the commercial real estate market. With an increased scrutiny and evaluation of the extension of credit, particularly with small and midsized banks, it will be more and more difficult to finance commercial deals, especially in the office and retail sector. Considering that this segment of the banking industry accounts for approximately 80% of commercial lending, there is concern that the tightening of credit availability may be the tipping point for pushing the overall economy into a mild recession.
While economic uncertainty is generally never good for the real estate market, our local real estate market has remained resilient to date. The next few months will be telling to determine if the recent banking turmoil has been contained or if it is symptomatic of more far-reaching issues in the banking system. The intangibles of a beautiful climate coupled with solid local economic conditions should continue to buffer some of these headwinds going forward.
Peter Crowley is president of Re/Max Alliance Group.
This article originally appeared on Sarasota Herald-Tribune: PETER CROWLEY: Home sales activity increasing despite banking turmoil
