You should watch out for this year’s bank crisis and its effect on Chicago.
In this article, you will learn about the following:
- The different banks that fell in the early 2023 Bank Crisis
- Impact on Chicago
- Why real estate is always “in”
In March 2023, three US banks fell so quickly followed by the second-largest bank in Switzerland, Credit Suisse.
The failure of these banks alarmed the whole world, more than simply investors, lenders, and financial institutions
This bank crisis played like a pile of dominoes that crashed from one collapse to another.
What happened to the banks in early 2023?
- First Silvergate Bank announced the winding down of its operations on March 8, 2023 due to losses suffered in its loan portfolio.
- Two days later, Silicon Valley Bank also collapsed from a bank run.
- Then on March 12, regulators shut down Signature Bank, citing systemic risks.
The California-based Silvergate Bank and New York-based Signature Bank worked as the two primary banks for cryptocurrency businesses.
On the other hand, Silicon Valley Bank caters to the companies of its eponymous community. SVB's clientele ranged from venture capital firms, startups to wealthy tech workers.
Unlike Silvergate and Signature who were affected by the cryptocurrency turmoil since last year, SVB’s troubles stemmed from the downward spiral of the tech industry and the Fed’s raising of interest rates.
Startups and venture capitalists realized too late that the bank could not meet their liquidity obligations because most of their funds were tied up in government bonds.
About 15% of the loans in Silicon Valley Bank’s portfolio were residential and commercial mortgages
What happened to SVB is now known as the second largest bank failure in U.S. history and the largest since 2008.
And in Europe, the long-beleaguered Credit Suisse fell because of distrust caused by bank failures in America. Decades by mismanagement, scandal and bad bets led the Swiss authorities to orchestrate its rapid takeover by UBS.
The Federal Reserve, Federal Deposit Insurance Corp. and Treasury Department guaranteed all depositors of these failed banks full access to their funds. This is a surprise move as FDIC usually only insures up to $250,000 per account.
So let’s get down to business. What’s the impact of the 2023 Bank Crisis on Chicago?
Impact of these bank failures in Chicago
While none of the banks that fell this year were based in Chicago, they have massive reach in Chicago’s business sector, the stock market, and the mortgage rate conditions.
Which Chicago companies have been affected?
Many Chicago companies were affected by the collapse of the aforementioned banks. These include the Chicago restaurant chain Fry the Coop, Andie Swim, Cirq Estate, Etsy, FarmboxRx, Folx Health, Rippling, Roblox, Roku, Summer Health, and Viome. Small businesses connected to the tech industry as gig workers were also affected by the stoppage of cash flow.
B. Stock Market Tumbles
Around the world, stock prices declined as investors were alarmed by the bank failures. For instance, fears about the state of the sector led to a dramatic decline in bank stock, with Santander down 7% and Commerzbank of Germany plunging more than 12%.
C. Falling Mortgage Rates
Following the failure of Silicon Valley Bank and New York's Signature Bank, mortgage rates have decreased by almost 50 basis points. According to Mortgage News Daily, the typical rate for a 30-year fixed-rate mortgage dropped from 7.05% to 6.57%.
Lawrence Yun, chief economist of the National Association of REALTORS® said, “The Silicon Valley Bank failure, along with a few other banks, means that the Federal Reserve cannot be so aggressive in raising its short-term interest rates. Therefore, mortgage rates will decline.”
Mortgage rates lately have tended to follow the movement of Treasury yields, which are falling. If rates trend low, more home buyers and investors could enter the market, especially when there are job additions to the economy.
This makes for an opportune time to refinance your mortgage to make it more attractive for your real estate portfolio.
Conclusion
Real estate investing is always "in". Given all this turmoil in the stock market and banking industry, you might be wondering: Why does real estate have longevity over other investments?
Real estate investments provide a hedge against inflation because the asset's value, on average, increases at or above the rate of inflation. Rents can be adjusted over time to account for variations in the inflation rate. Overall, real estate investors get stable cash flow, tax breaks, equity building, and competitive risk-adjusted returns.
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