bill: Silicon Valley Bancorp and Real Estate

Silicon Valley Bancorp and real estate.

Silicon Valley Bancorp and why do you care? Well, first let’s just take a quick peek at who Silicon Valley Bancorp is. They are the Bancorp to all the tech startups out in Silicon Valley. They’re actually the 15th largest financial institution. So it’s interesting that they failed on Friday. And so what happened there? And well, essentially when banks take depositors’ monies in, they lend it out.  Sometimes, these days, with the fed jacking rates, you actually get a return on your deposit. I know for the longest time zero interest is what you got in a savings account. But that has changed, earning interest back now. And so what does the bank do to earn money if when they’re not loaning it, they buy some treasury bills?  They will keep some and pay some out to the account holder as interest. That’s called profit in banking.

But what happened was the environment has changed in Silicon Valley.  Money is not flowing around as freely as it once was. Some of the venture capital companies, VCs, as people call them, are not spending. They’re going into their bank and spending some money on things like payroll, or whatnot, and sort of taking money out of the banks.  These VC’s started to chase yield on their bank deposits.  This is something lenders had not seen before. And they started to take money out of banks at a clip a little bit faster than normal. And that caused Silicon Valley Bancorp to have to sell some of their treasury bills, which those that were issued two to six months ago are worth now less than those that pay 4% today.

To understand this better, picture this scenario. If you can buy a bond today that pays 5%, why are you going to buy one that pays two percent? Right? So you’re going to discount the value of that two percent paper. And that was causing Silicon Valley Bankcorp to have to take some losses. So from a regulatory point of view, Silicon Valley had to let people know this, and that caused a run on the bank.

And by Friday you couldn’t get your money out of the bank like Roku, which is the streaming service everyone’s familiar with. According to the New York Times at the time of writing this article, they’ve got close to half a billion dollars there and they can’t get access to it. This could cause some problems. My life changes if I can’t access the half a billion dollars that I don’t have. So that causes a run on the bank.  People want access to their deposits.

What does this mean for real estate?

What does this mean for real estate and why is this bank’s collapse important? One of the biggest buyers of high-end real estate has been these people coming from the tech world and the venture capital world. You can take a drive around Cohasset there are plenty of people who play the VC game in town. So maybe that causes a little bit of a change. I do think when there’s a shake-up in the higher end of the economic system that does create opportunity.

The Wall of Worry

Do I think we’re going to see blood in the streets and a mad run on selling high-end real estate? No, probably not. I don’t think it’s that bad. It’s not 2008, but what if we get some spreading of this at other bank lenders? When Bear Stearns collapsed in 2008, everyone said, “Oh, it’s an isolated situation.” Well, two weeks later, Lehman Brothers collapsed. So do we know what’s going to happen there? I don’t. But I do think it will help supply. Because what happens when you get this little bit of worry and a little bit of spread, you get the wall of worry and the wall of worry always creates change, opportunity, and activity. What we need is the activity.

I see three things happening.

  • I do see the higher end of the marketing softening up a little bit as people want to preserve funds, seeing an economic slowdown or something in that world.  So the higher end slows down. That helps a little bit because it takes a little bit of pressure off demand.
  • The second thing I think that it’s really going to happen in real estate because of Silicon Valley Bancorp is you can see some sellers say, “Hey, do you know what? This market’s been strong, the pricing’s been really good. I’m going to take advantage of it and I’m going to sell at a good price and figure out what I’m going to do a little bit further down the road because the market’s moving in the direction of my benefit. I can sell high now and maybe six, 12 months be in a different environment for a purchase.” So may see some sellers taking advantage of that.
  • I think this releases the third thing, which creates a great opportunity. This is the undoing of the log jam. For the longest time, we’ve had people who just don’t want to do anything because they don’t want to hop in, sell their house with their 3% mortgage and buy a new one with a six or six and a half or close to 7% mortgage these days.

I believe this Silicon Valley thing going to spread, it will spook the capital markets a little bit and that will cause a little bit of selling in the high end, which will help fix the supply and demand equation in the inventory of the real estate available for sale. And that’s going to get us to where we need to be.

So that’s how Silicon Valley Bancorp ties into your life in real estate. And if you really want to talk about this further, I know a lot about building houses and a lot about selling houses, and I spent 10 years in financial services, so I know a little bit about that. I’d certainly love to talk to you about how it fits your situation and what I can do to help.

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