Could the Silicon Valley Bank collapse be a good thing for Bay Area homebuyers?

The economic instability is bringing some relief in the form of falling interest rates.

The Silicon Valley Bank meltdown has roiled the banking system, financial markets, the tech sector and even the Napa Valley wine industry. But the economic instability is also bringing a measure of relief to homebuyers struggling to afford a Bay Area real estate market where prices are starting to rebound after months of declines: lower mortgage rates.

And with the Federal Reserve’s decision this week to scale back raising its benchmark interest rate in response to the financial turmoil, mortgage rates will likely stay lower and could even dip through the rest of the year, according to some real estate experts and economists.

While recent headlines may be giving buyers unease, a rate break could mean hundreds of dollars in savings on monthly home payments.

“Silicon Valley Bank’s collapse is good for real estate,” said Chris Thornberg, an economist and founder of Beacon Economics. “I mean it.”

A typical 30-year fixed-rate mortgage averaged 6.42% this week, down from 6.73% two weeks ago, before the bank crash, according to data from Freddie Mac released Thursday.

For most of the past year, mortgage rates had been steadily climbing as a result of the Federal Reserve raising the cost of borrowing in its fight to cool inflation. That’s squeezed many home-seekers — who previously could take advantage of rock-bottom 3% rates during the pandemic homebuying boom — in turn cratering home prices from all-time highs during the first half of 2022.

After reaching a peak of 7.08% in November, mortgage rates started trending downward, before picking up again in February.

Then came the banking breakdown earlier this month. The uncertainty sent investors flocking to park their money in traditionally safe U.S. Treasury bonds, which has had the effect of bringing down mortgage rates. Meanwhile, the Fed’s announcement that it would raise its benchmark rate by only a quarter percent — the lowest possible increase — signaled continued downward pressure on mortgage rates.

“If it forces the Federal Reserve to truly sit on their hands and let inflation run, that will make interest rates come down, and that will be a relief for home real estate markets,” Thornberg said.

What could that all mean for home prices?

If the lower rates convince more people to jump into the market, prices could get a boost. That’s already started, on a monthly basis, at least. In February — before the bank failure — the median sales price of existing single-family homes in the Bay Area crept up 5% from January to $1.05 million, according to the California Association of Realtors.

That’s partly due to seasonal trends, but declining interest rates early in the year were likely a factor, said Oscar Wei, an economist with the association. Year over year, prices were still down a whopping 19% — the largest decline in the state — highlighting the dramatic slide in the Bay Area market.

Wei expects rates to decline to around 6.25% by late this year. And while that could provide real relief for some buyers, many would remain priced out.

“We’ll probably see some pretty lackluster sales throughout the year, just because of affordability,” Wei said.

For Matt Rubenstein, a real estate agent in Contra Costa County — where the median home price was $760,000, down 19% from $935,000 last year — concerns about the economy are the main thing on the minds of many of his buyers. Despite the lower rates now, he’s had two deals on homes over $1 million in Lafayette and Walnut Creek fall through in recent weeks because buyers backed out.

“Does a little bit of a rate drop offset the nervousness people are feeling about what’s going to happen with the banking situation?” Rubenstein asked.

Alan Wang, an agent in Santa Clara, said the recent waves of tech layoffs have also slowed homebuying in Silicon Valley. But given the high number of wealthy buyers and tight home inventory in the region, the market remains competitive even during relative downtimes, he said.

“Our market here in the SV is always teetering on becoming a seller’s market,” Wang said. “There’s really no choice.”

The median home price in Santa Clara County was $1.5 million in February, an 18% drop from $1.82 million last year and a 2% drop from the previous month.

In neighboring San Mateo County, meanwhile, prices dropped just 1% in February from last year to $2.08 million and climbed 28% from January. That was due to a surge in home sales of over $2 million, likely reflecting the earlier dip in rates starting at the end of last year, Wei said.

Even as more banks, including San Francisco-based First Republic, show signs of collapse, housing experts don’t expect that most lenders will start pulling back on issuing home loans.

That’s because the federal government runs programs to ensure banks have access to the private sector money needed to make home loans in good times and bad, and because long-term mortgages are generally considered safe forms of credit, according to Andy Winkler, director of Housing and Infrastructure at the Bipartisan Policy Center in Washington, D.C.

“For the most part, it is the commercial real estate sector, not residential, that appears most vulnerable,” Winkler said in an email.

“To be clear, this is an utterly different tough time for the housing market than a decade ago,” he said.