Why Elon Musk sees home prices, commercial real estate values ​​fall

Elon Musk says commercial real estate is “melting fast.”
Patrick Fallon / Reuters

  • Elon Musk warned this week that commercial real estate is melting and home prices will fall.
  • Tesla’s CEO blamed the Fed’s interest rate hikes for putting pressure on asset values.
  • Musk explained that higher rates mean higher mortgage costs, making homes cheaper.

Elon Musk sounded the alarm this week on US home prices and commercial-property prices. The billionaire’s warning reflects his concern that the Federal Reserve could choke the economy into an unnecessary recession.

“Commercial real estate is melting fast,” said the CEO of Tesla, SpaceX and Twitter. He tweeted. on Monday. “Continuity of Home Values.”

Interest rates and real estate

Musk’s concern is rooted in the feds. In response to historic inflation, the US central bank has raised interest rates from zero to 5 percent since last spring.

High interest rates encourage saving more than spending and make borrowing more expensive, which is often bad news for asset prices and economic growth. As they increase mortgage payments and finance costs, they tend to reduce real estate prices, leaving less money to buy houses or invest in offices and restaurants.

Higher prices erode the relative appeal of real estate to investors, as they drive up yields from bonds and savings accounts.

Moreover, after massive withdrawals of customer deposits this year caused major problems for several banks, smaller lenders are pulling back for fear of more bank activity, creating a credit crunch. They may also be more cautious about borrowing when the possibility of a financial downturn, stress on their property portfolio, and risk of credit defaults increases.

The shift to remote work since the pandemic also poses a threat to commercial real estate values. Fewer commuters shorten occupancy rates in office buildings, and affect traffic at commercial sites such as shopping malls and entertainment venues, making them less profitable for investors.

The painful downward pressure on property prices, high borrowing costs and tighter lending by regional banks is particularly bad news for the commercial real estate industry, which relies heavily on debt financing from small lenders.

Mask stress

Tesla’s boss has been making dire predictions about real estate for months.

“We certainly haven’t seen the commercial real estate shoe drop,” Musk said on Fox News’ “Tucker Carlson Tonight” in April. “This is not like a shoe, but like an anvil.”

The billionaire argued that the damage to his real estate portfolios would be minor, but could be severe in the coming months when clients cancel their leases, refuse to renew them — or go bankrupt.

What’s more, he said, housing prices could fall because some Americans can’t afford to pay as much for their mortgages.

Musk also weighed in on the amount of real estate debt expiring over the next five years, and homeowners facing significant increases in monthly payments after their fixed-term mortgages expire.

“This is the most serious concern yet,” he tweeted in March. “So is the mortgage.”

Tesla’s CEO zeroed in on housing market challenges and what they might mean for banks. At the beginning of this month.

“A sharp jump in monthly payments for a 30-year mortgage will significantly reduce housing affordability due to higher interest rates,” Musk tweeted. “If housing prices fall sharply, mortgage portfolios are at risk.”

It’s worth emphasizing that Musk stands to gain if real estate prices rally and the Fed lowers rates in response.

He complained that higher prices for Tesla vehicles translate into larger monthly car loan payments for consumers. As a result, Tesla has to lower prices just to maintain demand, he said.



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