How the Silicon Valley Bank Collapse Affects Real Estate

On March 10, the Silicon Valley Bank, a prominent lender in the start-up ecosystem, collapsed. Today we are going to summarize what happened and discuss how it affects real estate.

What is the Silicon Valley Bank?

Silicon Valley Bank is a Silicon Valley-based bank that specializes in funding technology companies. Most of these companies are backed by venture capitalists, and the money comes from Silicon Valley Bank. A lot of their major customers are giant tech companies and startup companies. Here are a few of their major real estate clients that you’ve probably heard of: OpenDoor, OJO, and AirBnB

Why the Silicon Valley Bank Failed?

This is based on the information we currently have. There will be a lot more information coming out on this story as time goes on.

They failed because they had a lot of customers that were all in one sector of the economy, technology. This sector has taken a huge hit, including companies like Facebook and Amazon. It makes sense that the bank for these companies is also taking a hit. 

In this situation, a few large customers started pulling out a whole bunch of money to meet their liquidity needs, and everybody got scared and followed suit. As word got out, the number of withdrawals sped up, making it so that Silicon Valley Bank couldn’t pay its bills.

Before we dive in further, it is important to understand how banks work. When customers deposit money into their bank, the bank takes money from their customers, put it in their bank, and then go reinvest this money. 

Silicon Valley Bank invested their money in long-term treasuries and mortgage-backed securities that carried very low interest rates. When Silicon Valley Bank clients started to pull their money out of the bank, they had to sell the bonds that were worth a lot less due to interest rates going up. Silicon Valley Bank lost a ton of money on what they were selling in order to fund people who were taking money out of the bank out of fear. 

How does this tie into real estate?

If a lot of these big companies cannot service their payroll, you are going to see a lot of layoffs. And if you see a lot of layoffs, what typically happens is that it hurts the overall economy, causing a recession. A recession leads to lower interest rates, and this is what nobody’s talking about in the marketplace. 

Lower interest rates are only going to come once there’s enough pain in the economy. A recession leading to lower interest rates is what is going to bring the housing market back. The current situation suggests this could be a good indicator for rates coming down sooner than a lot of people are thinking, but there’s probably going to be a little bit of pain involved. 

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