Rising mortgage rates began to impact housing prices and sales in the second half of 2022. According to the National Association of Realtors (NAR) , the national median existing-home sales price fell in January 2023 for the seventh straight month to $361,200, a decline of nearly 13% from the June 2022 price peak. However, after declining for 12 straight months, existing-home sales jumped 14.5% in February 2023, which contributed to an increase in the median existing-home sales price to $363,000. The jump was short-lived, with existing home sales declining 2.4% in March, down 22% compared to one year ago. The median existing-home sales price increased slightly in March to $375,700 but was still 0.9% lower compared to March 2022. Silicon Valley Bank The financial markets were recently shaken when on March 10, Silicon Valley Bank (SVB) became the second largest bank to fail in United States history. Silicon Valley Bank was uniquely positioned as a financial institution, as its client base was concentrated among primarily tech companies and venture capital firms, with an unusually high percentage of deposits (approximately 94%) uninsured. On March 8, the downhill slide began when SVB announced its intention to sell $1.75 billion of common and preferred stock to increase the strength of its balance sheet and offset bond investment losses. Earlier in the day, SVB completed the sale of substantially all of its available for sale securities portfolio, which was comprised primarily of long-term U.S. Treasuries. Although U.S. Treasury bonds are generally viewed as a relatively safe investment, the market value of bonds will decrease if market interest rates increase. If the bonds are sold prior to maturity, the bonds would be sold at a loss. The market value of bonds decreases as buyers pay less so they can achieve the higher yield afforded by rising market interest rates. As interest rates increased in 2022 and early 2023 the bonds lost value. Increasing interest rates will have a greater negative impact on long-term bonds than short-term bonds. The company’s CEO indicated that client “cash burn” had resulted in lower than forecasted deposits, as the company’s client base of tech companies had recently struggled which in turn reduced SVB deposits. As a result, SVB sold its bond portfolio to increase its cash and liquidity. SVB sold approximately $21 billion of securities, which would result in an after-tax loss of approximately $1.8 billion in the first quarter of 2023. The proceeds from the stock sale would offset the loss from the sale of bonds. However, the company’s proposed stock offering concerned investors about the financial strength of the company. The stock price tanked 60% on March 9 and approximately $42 billion of deposits were withdrawn by the end of the day. In particular, bank customers with uninsured deposits were concerned over the availability of funds. The bank’s proposed stock offering was intended to offset the bond loss, but the stock offering raised investor concerns over the risk and liquidity of the bank. A run on the bank occurred (aided by social media), and within 48 hours insolvency resulted. Shortly after the collapse of Silicon Valley Bank, Signature Bank became the third largest bank to fail. Spooked by the SVB debacle and contagion, customers withdrew $10 billion of deposits on March 12. The bank generally worked with crypto clients and real estate firms, and similar to SVB, had a high concentration of uninsured deposits (approximately 90%). The U.S. banking system requires banks to hold a relatively small percentage of bank deposits in the form of cash reserves. The reason is simple. The goal is to have banks act as a conduit for economic growth. Banks keep a small percentage of deposits and make loans with the rest. Although banks do not have the cash on hand that matches the amount of deposits, the Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 for each depositor. A significant demand by depositors for their money can result in the bank’s insolvency, as the bank will not have the necessary reserves. With the SVB and Signature failures, the Treasury Department stepped in and indicated it would “fully protect all depositors.” Even depositors with balances exceeding the normal FDIC insurance level of $250,000 would be protected. While depositors were protected, investors (shareholders) would not be bailed out. The Federal Reserve also announced a new Bank Term Funding Program, which will provide greater access to cash and needed reserves for financial institutions. In essence, banks can use financial securities as collateral for Federal Reserve funding rather than selling the securities in financial markets at a loss to raise needed cash. In essence, the Treasury, FDIC, and Federal Reserve collectively worked to assure that the U.S. financial system was sound and that the SVB and Signature failures were isolated.
Central Wisconsin Report - Spring 2023
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