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Just Listed: 1635 Cedar Crest Avenue

JUST LISTED

1635 Cedar Crest Avenue, Tahoe City, California

4 BR | 4 BA | 2218 SF

Listing  Price $1,680,000

CLASSIC A-FRAME ON THE WEST SHORE

Located just a few blocks from Lake Tahoe Park, the private HOA beach and recreation area, this home is your idyllic West Shore retreat. The attached living space/kitchenette/bathroom has a separate entrance, and can be closed off from the main home. This extensively remodeled home has four bedrooms, four bathrooms, a separate living area, and ample space for you and all of your visitors. The fully fenced backyard and large deck allow maximum optimization for your outdoor time, no matter what the season.

For showing appointment, contact Amie Quirarte.

PRICE REDUCTION: 160 Cherry Street

SUPREME PRIVACY IN NATURE

Beyond the A-symmetrical front gate lies 160 Cherry Street. Situated on 2.38 acres and backing to Forest Service land, this property encapsulates privacy and seclusion without compromising your proximity to the lake.

Completed in 2020, this home features endless unique components, such as a hanging staircase made out of forged steel, and the use of reclaimed wood from the original Tahoe Tavern Pier that was reworked for multiple pieces throughout this spectacular home. The 20-foot stone, floor-to-ceiling, double-sided fireplace centered in the great room is the heart for family gatherings and celebrations.

PRICE REDUCTION

160 Cherry Street, Homewood, California

6 BR | 5.5 BA | 5670 SF

Listing Price $9,800,000

The main home has five bedrooms, four and a half bathrooms, and a 1,400-square-foot deck with a covered patio and wood-burning fireplace. The guest house is a fully detached one-bedroom, one-bathroom unit with four additional built-in bunk beds to accommodate both friends and family.

Nestled between the guest and main homes is an outdoor patio with a gas fireplace and a 30′ outdoor water feature. There are two separate garages that can comfortably house five cars and a boat. The radiant heat, air conditioning units, air purifying system, elevator, and heated stairs and driveway are the finishing touches to ensure life at Cherry Street is as effortless as it gets.

As a member of Tahoe Swiss Village’s homeowner’s association, you can enjoy the use of two buoys, two piers, and a private beach located just across the street. This custom home was initially envisioned as a mountain lodge with an industrial feel, and the dedicated group of minds behind it brought this vision to life. It was designed, engineered, and built by local teams who have a deep affinity for this area and worked together to seamlessly integrate the intimate characteristics of the home with the nature that surrounds it.

For showing appointment, contact Amie Quirarte.

 

JUST LISTED: 144 Chipmunk Street, Unit 3

AN OASIS OF SERENITY IN KINGS BEACH

Breathtaking lake-views from this fully remodeled 3-bedroom, 3-bath condo located in the charming Brockway Shores lakefront complex with only 33 units. Open concept design with two ensuite bedrooms and two sunny decks. The spacious primary bedroom opens to a private deck with direct access to Lake Tahoe. Amenities include a private beach, pier, and HOA buoys. Enjoy relaxing on the beach or playing horseshoes on the lawn. Downtown Kings Beach is just a short walk from this spectacular unit.

JUST LISTED

144 Chipmunk Street, Unit 3, Kings Beach, California

3 BR | 3 BA | 1688 SF

Listing  Price $2,200,000

For showing appointment, contact Amie Quirarte.

JUST SOLD: 1058 TILLER DRIVE

JUST SOLD | Represented Buyer

1058 Tiller Drive, Incline Village, Nevada

5 BR | 4 BA | 3212 SF

Sale Price $4,250,000

Located in Millcreek on a private parcel surrounded by matures pines, this fully renovated custom home is steps from Lakeshore Boulevard and a short stroll to the private beaches and amazing amenities. The new homeowners will enjoy full IVGID privileges and Nevada’s tax friendly residency. Nevada is one of only nine states that has no state income tax.

For more information on Incline Village real estate, contact Amie Quirarte.

Photo courtesy: Coldwell Banker Select

Your Summertime Guide to North Lake Tahoe

NORTH LAKE TAHOE SUMMER EVENTS LINEUP

 

FREE WEEKLY MUSIC AND EVENTS | ALL SUMMER LONG, VARIOUS LOCATIONS

North Tahoe is home to an incredible lineup of free weekly events:

TAHOE CITY SOLSTICE FESTIVAL | JUNE 8-18, TAHOE CITY

To celebrate the kickoff of summer, this 10-day Solstice Festival will bring together artisan food and wine, acclaimed musicians and artists, and the celebrated shops, restaurants and galleries that reside on Lake Tahoe’s Tahoe City & West Shore.

TAHOE CITY FOOD & WINE CLASSIC | JUNE 10, 1-4 PM, TAHOE CITY

Enjoy a lakeside stroll downtown while tasting delicious wines and beverages paired with scrumptious bites from acclaimed North Lake Tahoe restaurants and caterers. The Classic is a fundraiser for the nonprofit Tahoe City Downtown Association.

TAHOE JOY FESTIVAL | JUNE 11, 12-5 PM, TAHOE CITY

Celebrate the local music and art community during the family-friendly Tahoe Joy Festival. During this free inaugural event, enjoy regional musicians Peter Joseph Burtt & the King Tide, Matt Axton & Badmoon and Jenni & Jesse of Dead Winter Carpenters, as well as youth performances, vendors, artists and food trucks. The festival benefits the Tahoe Truckee School of Music and the Tahoe City Downtown Association.

BROKEN ARROW SKYRACE | JUNE 16-18, PALISADES TAHOE, OLYMPIC VALLEY

The three-day racing event consists of eight iconic distances (plus a kids’ race) that showcase the beauty of Lake Tahoe. Designed in the vein of the classic European Skyraces, the Broken Arrow Skyrace represents a unique style of mountain running characterized by off-trail climbing on steep terrain with massive amounts of vertical gain and loss at altitude.

CRYSTAL BAY CASINO CONCERTS | JUNE 29-NOV. 4, CRYSTAL BAY CLUB CROWN ROOM

Ben Bailey, known as TV’s Cash Cab driver, will bring his comedy act to Crystal Bay Casino on June 29. Other acts scheduled to appear during the summer and fall include: Led Zeppelin cover band Zepparella on July 1; Tainted Love on July 22; Petty Theft on Aug. 26 and more.

LAKE TAHOE SHAKESPEARE FESTIVAL | JUNE 30-AUG. 20, SAND HARBOR BEACH, NEAR INCLINE VILLAGE

The festival’s 51st anniversary season is headlined by productions of the wild musical comedy, Little Shop of Horrors; and Young Shakespeare’s entertaining adaptation of William Shakespeare’s romantic comedy, As You Like It. In addition, the festival’s Showcase Series will feature performances by orchestras, tribute bands and more from July 21-Aug. 21. This stunning venue is a favorite among visitors and locals alike.

CLASSICAL TAHOE | JULY 9-AUG. 17, INCLINE VILLAGE

Experience a summer of wonderful music by the lake on the Sierra Nevada University campus. The Classical Tahoe Ricardi Pavilion is the site of outdoor orchestra, jazz and chamber music concerts by some of the leading classical musicians. Children will delight to the sounds of the Family Concert and Music Makers Faire, held from 11 a.m.-2 p.m. on July 30, with proceeds benefiting the festival’s educational programs.

GAMBLER’S RUN MUSIC FESTIVAL | JULY 14-16, CRYSTAL BAY CLUB CROWN ROOM

Fancy a unique blend of music, mountains and gambling? Twenty bands are scheduled to perform at Crystal Bay Casino’s inaugural three-day festival. Move to the quirky tunes with artists such as Pigeons Playing Ping Pong, Shovels & Rope, SunSquabi and Big Sam’s Funky Nation heading the lineup.

LAKE TAHOE REGGAE FESTIVAL | JULY 22-23, PALISADES TAHOE, OLYMPIC VALLEY

Enjoy a dozen-plus band performances and more at the 6th annual Lake Tahoe Reggae Festival. Among the scheduled bands are Rebelution, The Expendables, Pipe Down, Pepper, Stick Figure, Iya Terra and Claire Wright.

LAKE TAHOE DANCE FESTIVAL | JULY 26-29, VARIOUS VENUES

A highlight of summer in Tahoe City has become the Lake Tahoe Dance Festival, known for bringing first-rate artists from around the world. The 11th annual outdoor dance festival is a presentation of the Lake Tahoe Dance Collective and offers main-stage performances, audience participation demonstrations, meet-the-artist talks and more.

49TH ANNUAL LAKE TAHOE CONCOURS D’ELEGANCE | AUG. 11-12, HOMEWOOD

Widely regarded as North America’s premier wooden boat show, Concours d’Elegance will feature the world’s best antique and classic utility boats from various manufacturers. The event benefits the Tahoe Yacht Club Foundation to help preserve the environment and history of the Lake Tahoe Basin.

BREWS, JAZZ AND FUNK FEST | AUG. 12, 2-8 PM, THE VILLAGE AT PALISADES TAHOE, OLYMPIC VALLEY

At the Brews, Jazz and Funk Fest, you can sip on a wide array of tasty beers from more than 10 different breweries, as well as enjoy an incredible lineup of music on multiple stages from ALO, Monophonics and Sal’s Greenhouse. All proceeds from the event benefit the Humane Society of Truckee-Tahoe.

TAHOENALU FESTIVAL | AUG. 12-13, KINGS BEACH

The 17th annual TaHoeNalu Festival celebrates fun, family, friends and the Hawaiian spirit with an event that has grown from a grassroots dedication to the love of stand up paddleboarding to a multi-event festival. Novice paddleboarders and experts alike are welcome, with races, clinics, demos and a vendor village. There will also be live music, food and raffle drawings each day.

TAHOE CITY ART BY THE LAKE | AUG. 18-20, 10 AM-5 PM, BOATWORKS MALL, TAHOE CITY

Set on the North Shore of Lake Tahoe, the 13th annual Tahoe City Art by the Lake gives visitors an opportunity to meet with more than 30 artisans showcasing a wide variety of arts and crafts, including photography, oil paintings, ceramics, jewelry and more. The event area offers a stunning view of Lake Tahoe.

TAHOE CITY OKTOBERFEST | SEPT. 30, 11 AM-5 PM, THE VILLAGE AT PALISADES TAHOE, OLYMPIC VALLEY

The fun celebration of beer, music, dance and food returns on Sept. 30. The traditional Oktoberfest event features authentic German beer and Bavarian music and dance, as well as games and live entertainment. Authentic brats and pretzels, European desserts and pastries, and root beer floats for the kids make this an excellent event for all ages.

For more information about North Lake Tahoe events and festivals, visit www.gotahoenorth.com/events.

Photo Credit: GoTahoeNorth

JUST LISTED: 160 CHERRY STREET

Custom home mountain lodge

JUST LISTED

160 Cherry Street, Homewood, California

6 BR | 5.5 BA | 5670 SF

Listing  Price $10,200,000

Situated on 2.38 acres and backing to Forest Service land, this property encapsulates privacy and seclusion without compromising your proximity to the lake. As a member of Tahoe Swiss Village’s homeowner’s association, you can enjoy the use of two buoys, two piers, and a private beach located just across the street. This custom home was initially envisioned as a mountain lodge with an industrial feel, and the dedicated group of minds behind it brought this vision to life. It was designed, engineered, and built by local teams who have a deep affinity for this area and worked together to seamlessly integrate the intimate characteristics of the home with the nature that surrounds it. The methodical detail put into every decision is evident from the moment you walk in the 10-foot front door.

Completed in 2020, this home features endless unique components, such as a hanging staircase made out of forged steel, the use of reclaimed wood from the original Tahoe Tavern pier that was used for multiple pieces throughout the home, a custom A-symmetrical front gate, a 20-foot stone, floor-to-ceiling, double-sided fireplace centered in the great room, and much more. The main home has five bedrooms, four and a half bathrooms, and a 1,400-square-foot deck with a covered patio and wood-burning fireplace. The guest house is a fully detached one-bedroom, one-bathroom unit with four additional built-in bunk beds to accommodate both friends and family.

Nestled between the guest and main homes is an outdoor patio with a gas fireplace and a 30′ outdoor water feature. There are two separate garages that can comfortably house five cars and a boat. The radiant heat, air conditioning units, air purifying system, elevator, and heated stairs and driveway are the finishing touches to ensure life at Cherry Street is as effortless as it gets.

For showing appointment, contact Amie Quirarte.

FED HIKES RATES FOR 10TH TIME

BY EPHRAIM SCHWARTZ
Partner, Mortgage Consultant CMPS
O’Dette Mortgage Group
May 8, 2023

This past week the Federal Reserve raised rates for the 10th time in a little over a year. Let’s discuss what happened as we await yet another Fed rate hike next Wednesday.

“Was it something I said or something I did? Did the words not come out right?” Every Rose Has Its Thorn by Poison.

The Last Hike?

As we expected, the Federal Reserve raised the Fed Funds Rate to a range of 5.00% – 5.25%. Remember, this interest rate affects short-term loans like credit cards, autos, and home equity lines of credit.

The big question is whether this will be the last hike. When the Fed statement was released, the markets believed the Fed was signaling a pause by omitting the following line from the previous statement: “The Committee anticipates that some additional policy firming may be appropriate.”

However, shortly after the statement was released, Fed Chair Powell hosted a press conference and right at the top said the Fed Members have not discussed a “pause” in rates. Bottom line? Expect more uncertainty and volatility as it relates to rates.

Sound And Resilient

This is the term Fed Chair Powell used to describe the banking sector. Unfortunately, we are seeing more banks have issues. This week it was First Republic taken over by JP Morgan Chase and as of this writing PacWest was said to be “exploring strategic options.” The fear of banking contagion has elevated uncertainty in the financial markets. It’s not clear if and how many more banks will continue to have issues. Bottom line? The fear of this story has created a “safe haven” to trade into bonds where prices move higher, and rates move lower.

European Central Bank Hikes By Less

The European Central Bank (ECB) hiked their benchmark rate by .25%, the smallest since the start of their hiking cycle. Like our Fed, they too signaled they would be “data-dependent” going forward, leading markets to speculate a pause on future rate hikes.

Bottom line: The Federal Reserve is sending mixed messages on the future direction of rates. Meanwhile, long-term rates, which the Fed doesn’t control, are near their best levels in months and sense all the uncertainty in our economy will prompt the Fed to pause and potentially cut rates later this year. The incoming data and issues in the banking system will determine what happens next.

Looking Ahead

Expect market volatility to continue next week. The Consumer Price Index (inflation) will be reported. If this number comes in higher than expected, rates could rise. The opposite is true. Despite this being a backward-looking number, we will have Fed officials continue to speak and comment on the release and how they feel it impacts future Fed policy and interest rate decisions.

 

Changes to LLPA’s on May 1st

BY EPHRAIM SCHWARTZ
Partner, Mortgage Consultant CMPS
O’Dette Mortgage Group
April 27, 2023

We’ve been getting a lot of questions about the new LLPA (loan level price adjustment) for Conforming loans and if people with worse credit will really get better rates than borrowers with excellent credit.  The short answer is NO, and your clients should never intentionally damage their credit.  Surprise, surprise, there’s some entirely incorrect information circulating that your clients may be exposed to.  Below is an explanation and FAQ’s:

What is changing?

Fannie May & Freddie Mac base pricing adjustments for credit scores & down payment are changing.  Borrowers with a lower credit score & lower down payment will not be as heavily penalized.  And, borrowers with best case scenario credit scores & down payment will receive less of a benefit than before.  So, the difference in rates between best case credit profile vs. lower credit score will be less significant.  These changes apply to every conforming loan funded by each & every mortgage company.

Does this mean borrowers with lower credit scores get better terms than those with higher credit score?

No.  People will still be in better position with a better credit & more down payment.   The difference between excellent & lower credit tiers will be less significant.

When does this go into effect?:

It’s been priced into rates for over a month now.  The May 1st date is when these adjustments go into effect for the mortgages purchased on the secondary market by Fannie/Freddie.   Banks knew this was coming, so these changes have already priced in and borrowers will not see any changes to rates over the next week, outside of the normal day to day bond/rate fluctuations.

What is the FHFA trying to achieve with these pricing adjustment? 

We all know Fannie/Freddie’s mission to increase access to affordable housing.  It’s always been their mission and it’s been a priority for the director of FHFA.   The new director of the FHFA has been vocal in disapproval of the solutions provided by Franny and Freddie and she thinks more is required of them to increase access to affordable housing, and she thinks this will help increase access to affordable housing.

Is this a good idea and will it work?:   We don’t like it but the whole world has to deal with it, so it is what it is at this point.  We do not see these pricing changes moving the needle in making homeownership more attainable for more Americans because even after these changes a borrower with low 600’s credit score is still better off going with an FHA loan, and those who have done a great job managing credit are stuck a hair worse pricing.  A better idea would be a campaign to educate people on how to manager credit; it’s not complicated and the information could be shared on something as simple as this one page I put together and have been sharing with clients for over a decade (see attached).   WE (all of us on the real estate community) continue to be the front lines in educating the public on all things related to buying, investing, & enjoying real estate.

Credit Health Tips

If you want to dig into the details, here are some example of scenarios that will be most affected: Attached is a matrix showing which scenarios have pricing improvements (green) vs. hits (red), relative to the old standard LLPA’s.

  • LTV’s in the 80% – 85% range are most significantly affected, so more borrowers in the ~19.99% – ~15% down might consider just doing 10%.
  • Cash-out refinances hits are mostly greater, unless you have top tier (>780) credit, or extremely low LTV (<30%).   So, cash-out refi is actually a scenario where if credit is >780, pricing adjustments have improved.
  • Price improvements for 2 & 3 unit properties.
  • Price improvements for low LTV investment properties.
  • Vacation Homes & Investment Properties essentially priced the same now.

LLPA Changes 2023

THE MORNING: THE FED’S UNPLEASANT CHOICE

Good morning. The Fed must choose between two unpleasant options today. It’s a reminder of the high cost of weak bank oversight.

The Federal Reserve building. Haiyun Jiang/The New York Times
BY DAVID LEONHARDT
The New York Times
March 22, 2023

Inflation — or turmoil?

The Federal Reserve faces a difficult decision at its meeting that ends this afternoon: Should Fed officials raise interest rates in response to worrisome recent inflation data — and accept the risk of causing further problems for banks? Or should officials pause their rate increases — and accept the risk that inflation will remain high?

This dilemma is another reminder of the broad economic damage that banking crises cause. In today’s newsletter, I’ll first explain the Fed’s tough call and then look at one of the lessons emerging from the current banking turmoil. Above all, that turmoil is a reminder of the high costs of ineffective bank regulation, which has been a recurring problem in the U.S.

The Fed’s dilemma

The trouble for the Fed is that there are excellent reasons for it to continue raising interest rates and excellent reasons for it to take a break. On the one hand, the economic data in recent weeks has suggested that inflation is not falling as rapidly as analysts expected. Average consumer prices are about 6 percent higher than a year ago, and forecasters expect the figure to remain above 3 percent for most of this year. That’s higher than Fed officials and many families find comfortable. For much of the 21st century, inflation has been closer to 2 percent.

An inflation rate that remains near 4 percent for an extended period is problematic for several reasons. It cuts into buying power and gives people reason to expect that inflation may stay high for years. They will then ask their employers for higher wages, potentially causing a spiral in which companies increase their prices to pay for the raises and inflation drifts even higher. Today’s tight job market, with unemployment near its lowest level since the 1960s, adds to these risks. The economy still seems to be running hotter than is sustainable.

This situation explains why Fed officials had originally planned to continue raising their benchmark interest rate at today’s meeting — thereby slowing the economy by increasing the cost of homes, cars and other items that people buy with debt. Some Fed officials favored a quarter-point increase, which would be identical to the increase at the Fed’s meeting last month. Others preferred a half-point increase, in response to the worrisome recent inflation data.

The banking troubles of the past two weeks scrambled these plans. Why? In addition to slowing the economy, higher interest rates depress the value of many financial assets (as these charts explain). Some bank executives did a poor job planning for these asset declines, and their balance sheets suffered. When customers became worried that the banks would no longer have enough money to return their deposits, a classic bank run ensued. It led to the collapse of Silicon Valley Bank and Signature Bank, and others remain in jeopardy.

If Fed officials continue raising their benchmark rate, they risk damaging the balance sheets of more banks and causing new bank runs. That’s why a half-point increase now seems less likely. Some economists (including The Times’s Paul Krugman) have urged the Fed to avoid any additional increases for now. Many analysts expect the Fed will compromise and raise the rate by a quarter point; Jason Furman, a former Obama administration official, leans toward that approach.

The decision is unavoidably fraught. The Fed must choose between potentially exacerbating problems in the financial markets and seeming to go soft on inflation.

Why bailouts happen

All of which underscores the high cost of banking crises. In most industries, a company’s collapse doesn’t cause cascading economic problems. In the financial markets, the collapse of one firm can lead to a panic that feeds on itself. Investors and clients start withdrawing their money. A recession, or even a depression, can follow.

These consequences are the reason that government officials bail out banks more frequently than other businesses. Bailouts, of course, have huge downsides: They typically use taxpayer money (or other banks’ money) to subsidize affluent bank executives who failed at their jobs. “Nobody is as privileged in the entire economy,” Anat Admati, a finance professor at Stanford University’s business school, told me.

During a crisis, bailouts can be unavoidable because of the economic risks from bank collapses. The key question, then, is how to regulate banks rigorously enough to minimize the number of necessary bailouts.

Over the past few decades, the U.S. has failed to do so. After the financial crisis of 2007-9, policymakers tightened the rules through the Dodd-Frank Act. But Congress and the Trump administration loosened oversight for midsize banks in 2018 — and Silicon Valley Bank and Signature Bank were two of the firms that stood to benefit.

As complicated as finance can be, the basic principles behind bank regulation are straightforward. Banks require special scrutiny from the government because they may receive special benefits from taxpayers during a crisis. This scrutiny includes limits on the risks that banks can take and requirements that they keep enough money in reserve to survive most foreseeable crises. “You make sure they have enough to pay,” as Admati put it.

Bank executives and investors often bristle at such rules because they reduce returns. Money held in reserve, after all, cannot be invested elsewhere and earn big profits. It also can’t go poof when hard times arrive.

SVB FAILURE AND RATES

BY TERESA O’DETTE & EPHRAIM SCHWARTZ
Mortgage Consultants
O’Dette Mortgage Group
March 21, 2023

Quite an exciting week and a half and I have some additional commentary to share in addition to this week’s MMG update (below).   Silicon Valley Bank failed for several reasons, and while it is of course the bank’s responsibility to manage risk, it was the Fed being late to the game in hiking the Fed Funds rate and then hiking so much in such a short period of time that pushed SVB’s bond holdings so significantly underwater.   SVB held a large position in government bonds, which are generally considered the world’s safest parking for money, and those bond yields were as close to zero as they’ve ever been.   A bond’s value on the market can be determine primarily by; it’s yield the maturity.   So, when the Fed hikes rates rather drastically in a such a short period of time, new bonds become available with a dramatically higher yield, in comparison to those bonds SVB & others were buying just a handful of months earlier – with a relatively small difference in maturity.   This put the value of those bonds underwater, but that’s not what caused the problem.    If SVB had been able to simply hold those bonds to maturity, there would have been no loss.  However, after some prominent VC’s yelled fire in the theatre & sparked a run on the bank with depositors to pulling money out, SVB quickly tried to raise capital to cover those withdrawals, and when they couldn’t raise money, they were forced to sell those underwater bonds to cover the withdrawals.   Yes, there are some things SVB should have done differently, like fill that Risk Management Officer role that sat vacant tail end of last year, and hold less in such low yield bonds, but it was the Fed’s concentrated rate hikes that pushed those low yield young in maturity bonds underwater.   The bank failure was backstopped by the Federal government working with FDIC to use funds from the FDIC insurance pool to guarantee all depositors would be made whole.   No tax payers dollars were used for this bail out, bank executives are being held accountable for poor risk management, and many who are often most critical of government intervention in markets agree, the administration & FDIC did an excellent job solving this potential crisis.

With respect to how all this this impacts mortgage rates, US bonds & treasuries are still the world’s safest parking for money, so SVB inspired concern surrounding regional banks has created a flight to safety with investment capital going into bonds, that demand pushes bonds prices up & yields/rates down.  As a result, the past week has seen the most significant improvement to mortgage rates since the November & December CPI (inflation) reports came in lower than expected.   Last week’s (3/14) CPI report came in exactly at market expectations of 6.0%, which allowed mortgage rates to hold on to gains.  This week’s Fed meeting is another potentially high impact event.  Wild week, but with respect to mortgage rates, they improved a bit last week and we expect inflation to continue gradually decrease and we still expect mortgage rates to be a little lower by end of this year – best guess would be mid/low 5%’.s

This past week, home loan rates improved to their lowest levels in a month in response to the closures of Silicon Valley Bank (SVB) and Signature Bank. Let’s walk through what happened as we approach the Fed Meeting next week.

“Bringin’ on the heartache, Can’t you see?, Can’t you see?” Bringin’ on the Heartbreak? Def Leppard.

SVB Failure and Rates

It’s important to remember that bonds enjoy bad news, so when word broke earlier this week that SVB was shuttered by the FDIC, home loan rates improved to their best level in six weeks. At the same time, the 2-year Note yield, which tracks Fed rate hike activity, plummeted from over 5.00% to under 4.00% in just a couple of days. This was an epic decline in rates not seen even after 9/11 or the Great Recession.

The good news (in the case of SVB and even Signature) is that bad management, failure to manage interest rate risk and a widespread desire for depositors to gain access to their funds (bank run) is what caused these banks to shutter.

In response, the Federal Reserve immediately created a line of credit and an implicit backstop to protect any depositors from any losses. This was good news and will hopefully limit any further fallout in the banking sector.

So, what does the Fed do with rates now that we have high uncertainty and contagion risk in the banking sector?

Stability > Inflation

Seeing that one reason SVB failed was in response to a rapid rise in interest rates, there is increased pressure for the Fed to limit rate hikes going forward and regain stability in the financial sector.

Just last week there was a high probability the Fed would raise rates by .50. Now just days later, there is a 75% chance of a .25% and a 25% chance the Fed doesn’t hike rates at all.

Next week’s Fed Meeting and press conference will hopefully have the markets feeling that the Fed is going to take every measure possible to ensure stability while they closely watch the pace of inflation decline.

Housing Numbers OK

It wasn’t all bad news this week. Housing numbers for February highlighted the little rate relief we saw in January and brought some optimism into February. Both Housing Starts (which is putting the shovel in the ground), and Permits (a leading indicator of future building), came in better than expectations.

This bodes well for housing in the months ahead, especially combined with the rate relief we are experiencing.

Bottom line: This week’s news in banking has changed everything as it relates to the Fed and rate hikes. The markets are suggesting the Fed will be cutting rates in the second half of the year which is a big change from the rate outlook just days ago.

Looking Ahead

Next week brings the Fed Meeting and monetary policy decision. As we shared, it appears the Fed is only going to raise rates by .25%, rather than .50% to foster stability in the financial markets and avoid contagion in the banking sector. What the Fed says will be important in bringing calm to the markets during this uncertain moment.