The US banking meltdown is moving at speed. Last Wednesday, investors thought Silicon Valley Bank (SVB) was in great shape. On Friday, it collapsed. On Sunday, Signature Bank went under, too.
When Wall Street opened yesterday, US bank stocks suffered a bloodbath. Western Alliance Bancorp crashed 82.55 percent, while Republic Bank plunged 76.57 percent and PacWest Bancorp fell 52.57 percent.
Contagion fears were rife. In the UK, shares in Barclays fell 6.31 percent and Lloyds fell 5.12 percent.
Yet it’s an ill wind that blows nobody any good and the banking crisis may offer a ray of light to cash-strapped homeowners.
Central bankers such as the US Federal Reserve and Bank of England have been hiking interest rates at full throttle, in a desperate bid to curb inflation.
As we reported yesterday, two million homeowners face a nightmare as their mortgage repayments rocket.
That nightmare seemed likely to get even more harrowing as markets expected the Fed and BoE to hike rates as high as six percent to control today’s rampant inflation.
That would have driven mortgage rates to seven or eight percent and triggered a UK housing market meltdown.
As higher borrowing costs send US banks and businesses to the wall, the Fed will nnow be forced to call a halt to interest rate hikes.
The BoE is bound to follow and soon interest rates could even start falling, bring massive relief to UK homeowners and house prices.
Right now, the UK housing market is on a knife edge, with Capital Economics predicting a 12 percent drop and Japanese Bank Nomura forecasting 20 percent.
The cracks are starting to show, with prices in Southampton down 17 percent, according to analyst TwentyCi, and Falkirk, Dorchester, Telford, Plymouth and Llandudno close behind.
The cost-of-living crisis and the exodus of buy-to-let landlords have hit demand, but the main damage has been done by rocketing mortgage rates.
Best buy rates have risen fourfold in just 18 months, from less than one percent to more than four percent, with further increases expected.
Buyers are “rattled” and vendors “anxious”, says Jonathan Hopper, chief executive of Garrington Property Finders, with BoE figures showing mortgage approvals falling by almost half in January.
So far, homeowners have been protected because most have locked into fixed-rate mortgages. Millions face a payment shock as their deals expire this year.
Many could pay hundreds of pounds extra every month, triggering a wave of force sellers and repossessions.
Yet in the wake of the banking meltdown, we now be spared any further interest rate hikes.
The Fed was expected to hike by another 0.50 percent at its next meeting on Wednesday 22 March, lifting the Fed funds rate to 5.25 percent.
That’s almost certainly not going to happen now.
Nor will a second hike of 0.50 percent anticipated on May 3, which would have lifted rates to 5.75 percent, says Eric Vanraes, a bond portfolio manager at Eric Sturdza Investments.
“The Fed knows that any further rate hike could trigger further bankruptcies in banks, hedge funds, pension funds, and the real estate market,” he says.
It simply can’t allow that to happen.
US interest rate expectations have already plunged, with two-year bond yields falling from 5.05 percent to 4.10 percent in just three days.
That may not sound much to you and I, but Yves Bonzon, group chief investment officer at Swiss private bank Julius Baer, says it’s huge.
READ MORE: Peak interest rates will prevent a house price crash but savers pay
“Such a rapid fall in US short-term rates is extremely rare, only matched by events such as the 1987 crash or the 9/11 terror attacks.”
Bonzon said markets are now “pricing in rapidly diminishing odds of further rate hikes” and the Fed could even be forced to cut at some point.
“The Fed has clearly reached the limit of its ability to tighten without triggering a crisis,” he added.
Several readers have accused me of being a misery guts in recent days, thanks to articles like this one.
One even suggested I’m no fun at parties – and he may be right – so I’m keen to redress the balance by highlighting one of the few positives of today’s dire situation.
Interest rates cannot rise much further – if at all – before doing more harm than good.
Just one week ago, markets expected rates to stay “higher for longer”. That can’t happen now.
Which offers a scrap of good news for worried homeowners. You heard it here first.
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