The collapse of banks such as Silicon Valley Bank and Signature Bank has spooked many investors who have withdrawn large sums of money from regional banks and moved them to larger financial institutions for safekeeping.
With the economic outlook uncertain, experts are concerned about the availability of credit from homebuilders and mortgage lenders, which could hurt the housing market.
Wall Street expects credit conditions for the US economy to become even tighter in the coming months. Goldman Sachs recently lowered its forecast for US economic growth and expects small and medium-sized banks to scale back lending to maintain liquidity.
Robert Dietz, chief economist at the National Association of Home Builders, said such a pullback could hit homebuilders, which could hurt housing supply.
Dietz told MarketWatch that builders are concerned about "their ability to get debt financing to acquire and develop land."" Much of this financing originates in the regional banking system, which is under some pressure given recent events."
With the US already running a housing deficit, the squeeze on credit availability is likely to continue to keep the cost of home ownership high due to tight supply. According to Realtor.com® calculations, there is a shortage of 2.3 million homes in the US.
(Realtor.com is operated by News Corp.'s subsidiary Move Inc. and MarketWatch is a division of Dow Jones, a subsidiary of News Corp.)
Many builders have used rate buybacks, price cuts and other incentives in their financial arsenal to drive sales by lowering the cost of new construction, and Lisa Sturtevant, chief economist at Bright MLS, told MarketWatch that this could be coming to an end.
"More borrowing difficulties will mean that some builders will be less flexible in offering home purchase reductions and other financial incentives," she explained.
Housing starts rose nearly 10 per cent in February, with a surge in flat construction in the Midwest. It was the first time in six months that housing starts had risen.
But that strength "is problematic," Zonda chief economist Ari Wolfe told MarketWatch, "because we're unlikely to get out of the mess associated with the financial sector."
Like Dietz, Wolfe said she expects builders working with smaller and regional banks will find it more difficult to get credit now than in previous years.
"There may be interest in building more homes, but the total number may be held back by reduced financing," she added.
Mortgages for homebuyers are a different story.
Over the past decade, small domestic commercial banks have ramped up their mortgage business, as can be seen in the chart below by Torsten Slok of Apollo.
Now, an uncertain economic outlook does not necessarily mean bad news.
Concerns about job security in a recession can slow demand and thus push down sales. And smaller banks may be more reluctant to lend because they need to increase their reserves.
The supply of mortgage credit fell by 3% in February to its lowest level since January 2013, indicating that lending standards are tightening, according to the Mortgage Bankers Association.
However, the economic slowdown has helped to lower mortgage rates. Fears of a recession - which suggests the US Federal Reserve is likely to abandon aggressive rate hikes - pushed investors into 10-year Treasuries, which then pushed mortgage rates lower.
Freddie Mac said the 30-year mortgage rate fell to 6.6 per cent in the latest week.
Private data shows that buyers are returning to the market as rates fall. As of Friday, a record number of potential buyers were locking in rates at their mortgage companies on any day so far in 2023, according to Redfin.
Mortgage demand jumped overall last week, according to the Mortgage Bankers Association.
"There is no evidence yet that instability in the banking sector will result in homebuyers struggling to secure mortgages," Sturtevant said.
"In the short term, the current situation has resulted in lower mortgage rates, which presents more opportunities for potential buyers and homeowners looking to refinance," she added.