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Are the West’s housing markets in for more pain after Silicon Valley Bank collapse?

Tech is big segment of Utah’s economy, but economist expects state’s diversified job force will soften any blows

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Houses under construction near Thanksgiving Point and Silicon Slopes in Lehi, Utah.

Houses under construction near Thanksgiving Point and Silicon Slopes in Lehi on Tuesday, March 14, 2023.

Scott G Winterton, Deseret News

The West has been ground zero for the national housing market correction ever since the Federal Reserve’s fight with inflation sent mortgage rates soaring last year.

Now the West’s housing markets could be in for some more pain, depending on how far reverberations from the collapse of Silicon Valley Bank reach.

However, it’s also possible lower interest rates could help soften affordability and help more buyers access the market, at least in the short term.

It all depends on how deep economic impacts run, according to economists and housing analysts.

“Unfortunately, home prices in tech and venture capital hubs are already down the most from 2022 peaks for markets we track across the country. Any additional setbacks for tech & VC (now brewing) aren’t ideal,” tweeted Rick Palacios Jr., director of research at John Burns Real Estate Consulting, last Saturday.

By the close of 2022, the tech world was already experiencing layoffs, and it’s not certain how many more tech jobs could evaporate in the wake of the collapse of Silicon Valley Bank, the nation’s 16th largest bank, last Friday. Soon after, on Sunday, New York-based Signature Bank was also shuttered by state regulators.

Impact on housing in the West

How could this impact housing markets in tech hot spots throughout the West? That hinges on unique local housing market characteristics and how sensitive they may be to any upset to the tech industry.

By Monday, however, the fallout from SVB was expected to be largely contained after the Treasury Department, Federal Reserve and FDIC jointly announced that all Silicon Valley Bank and Signature Bank clients would be protected and able to access their funds.

If the deposits hadn’t been protected over the weekend, “that would have had devastating impacts in very short order,” said Phil Dean, public finance senior research fellow at the University of Utah’s Kem C. Gardner Policy Institute. “That’s not what happened.”

“The broader question,” Dean said, “is what does that do to people’s perception, to people’s sentiment about risk right now in the economy?”

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Houses under construction near Thanksgiving Point and Silicon Slopes in Lehi on Tuesday, March 14, 2023.

Scott G Winterton, Deseret News

While those two banks had “narrow niches,” Dean said, and regulators stepped in to shield from any direct impacts, “it will be interesting to see how it plays out” in coming weeks.

“It is a concern” for the housing market, said Dejan Eskic, senior research fellow at the Kem C. Gardner Policy Institute and one of Utah’s leading housing experts. “I expect there to be a little more pain.”

However, Eskic noted there could also be a “silver lining for housing,” at least in the short term, because mortgage interest rates dropped in the wake of SVB’s collapse.

“The heightened economic risk is likely to bring a short-term boost to the housing market by way of lower mortgage rates,” Skylar Olsen, Zillow’s chief economist, wrote in a Tuesday post. “Initial panic has eased, but market watchers worry that SVB’s missteps are more widespread, and investors are likely to pursue safer assets. The Fed might now rethink strong rate increases that appeared imminent just weeks ago.”

When mortgage rates climbed back above 7% earlier this month, it “stifled momentum that had been building as rates originally drifted down to start the year. Today, falling mortgage rates could thaw what was shaping up to be a fairly frozen spring home shopping season,” Olsen wrote.

Those lower rates could help homebuyers who have been priced out, “but if SVB’s troubles are indicative of wider issues, a coming recession could be deeper and longer-lasting than expected,” Olsen said. “That raises the odds that income or job loss could start affecting housing markets where the economic stress is concentrated.”

Western housing markets are especially “hypersensitive” to interest rates, Fortune reported Saturday. “For one thing, Western markets are at risk of such pullbacks because home prices in those places are so far detached from local incomes. Second, Western markets have a high concentration of tech jobs, which are vulnerable to layoffs anytime interest rates get jacked up.”

A more widespread tech downturn may be felt in housing markets in the San Francisco Bay Area, home to Silicon Valley, and Seattle, Olsen said, which could lead to further price declines in those places. For buyers today, especially those shopping in high-priced areas, “a sustained rate drop will be a welcome boost to affordability, but they should still plan on rate volatility,” Olsen said.

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Houses under construction near Thanksgiving Point and Silicon Slopes in Lehi on Tuesday, March 14, 2023.

Scott G Winterton, Deseret News

How will Utah’s housing market be impacted?

Tech jobs do make up a substantial part of Utah’s economy. Directly and indirectly, tech companies support more than one in seven or about 15% of Utah jobs and almost one-fifth of worker earnings in the state, according to a 2019 Kem C. Gardner Policy Institute report.

Those statistics include a broad definition of tech jobs, from IT support in government, health care and other industries, Dean noted, but “even with those caveats tech is a sizable portion of the Utah economy.” Utah’s tech sector, based along the Point of the Mountain in southern Salt Lake County and Utah County, is known as Silicon Slopes.

However, Utah’s economy is more diversified than in places like San Francisco, for example, home to Silicon Valley and its many start-up and global tech companies, Dean and Eskic said.

“Our economic diversity is one of the strongest, if not the strongest,” Eskic said. But he also noted even “from a cultural perspective” the tech industry has a larger reach. “There’s a weight that comes with tech. When something’s happening in tech, it reverberates throughout the rest of the economy.”

For the most part, federal regulators’ announcement that Silicon Valley Bank’s depositors would be protected quelled much of the concern that rocked Utah’s Silicon Slopes in the wake of the bank’s failure.

“What I’m hearing is a sigh of relief,” said Clint Betts, executive director of tech sector advocacy and education group Silicon Slopes. “Let’s see if there’s not a contagion. It doesn’t seem like there is. It seems like a lot of these banks are hanging in just fine regardless of what’s happening (in) the market. And you just hope to get through these things.”

Regulators’ decisive move to help depositors placated immediate concerns, and there seems to be more optimism than fear in Utah’s tech industry, Dean said, but there’s still uncertainty about what may come next.

“As far as impact, I’m not sure that I know,” Betts said. “Tech is a boom-and-bust business, and kind of always has been.”

So is housing. “And they kind of track with each other,” he added. “And I’m not sure that we’re in a bust cycle or if we’re still in this boom cycle. It does feel like Utah is a bit insulated from some of this stuff, just given the types of companies we build, (such as) business to business companies or software to service companies. Those aren’t as risky as like, ‘We’re going to build the new Twitter.’”

Eskic noted that a substantial part of Utah’s in-migration growth — which spiked during the pandemic housing frenzy in 2020, 2021 and the early parts of 2022 — is likely due to tech jobs that also thrived during the same time. That certainly helped drive up housing prices, and could be a factor that brings them down further.

In late 2022 and early this year, Utah’s housing prices already started to dip as high mortgage rates essentially froze the housing market, and experts have predicted 2023 will continue to be a tough year for real estate, at least until mortgage rates settle.

Utah, however, continues to suffer an estimated 31,000-unit housing shortage, and even as the national market cools, housing experts, including Eskic, don’t expect Utah’s affordability problems to disappear.

“We’ve never operated in this type of environment, having such a high cost of living,” Eskic said. “So, it could definitely impact our net migration. ... That could impact our housing market.”