Banking system failures affect real estate industry
By: J. David Chapman/March 23, 2023
I’m being asked about the effect of bank failures and banking system insecurities on the real estate industry. Locally, there is no indication that any of our banks are having any issues whatsoever. The banking system is critical to the real estate industry because banks lend money to real estate developers, which they use to finance construction projects. Banks also provide mortgage loans to homebuyers, which they use to purchase homes. Therefore, any failure or disruption in the banking system can have a severe effect on the availability of financing for real estate projects and purchases. We also now know that several large brokerages were banking with the few banks that had problems and missed payroll. Everyone eventually got paid. However, it definitely created a disruption in business.
One of the significant effects of banking system failures on the real estate industry is a reduction in the availability of credit. When the banking system fails, banks may become reluctant to lend money, leading to a tightening of credit standards. This can make it more challenging for real estate developers to obtain financing for their projects and for homebuyers to secure mortgage loans. As a result, the real estate industry can experience a significant slowdown, with fewer construction projects and home sales.
Another effect of banking system failures on the real estate industry is a decrease in property values. When banks become reluctant to lend money, there is less demand for real estate, leading to a decrease in property values. This can be especially problematic for homeowners who may have purchased homes at inflated prices during a boom in the real estate market. A decline in property values can lead to negative equity, where the outstanding mortgage balance is greater than the value of the property. Negative equity can make it challenging for homeowners to sell their homes or refinance their mortgages, which can lead to a wave of foreclosures.
A banking system failure also can have ripple effects throughout the economy, causing a reduction in customer confidence. Real estate performance is strongly correlated with consumer confidence. When banks fail, they may be forced to close, leading to job losses and a reduction in economic activity. As such, it is critical that regulators and policymakers take steps to ensure the stability and soundness of the banking system to prevent such failures and disruptions.
J. David Chapman is a professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).