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- Elon Musk warned that house prices would fall and commercial real estate will be in a state of meltdown.
- Tesla's CEO blamed Fed interest rate increases for the pressure placed on property values.
- Musk explained that higher mortgage rates would mean more expensive homes, which makes them less affordable.
Elon Musk raised the alarm this week about US house prices, and commercial property values. Elon Musk's warning is a reflection of his concern that the Federal Reserve strangles the economy, threatening a recession.
The CEO of Tesla, SpaceX and Twitter tweeted that "commercial real estate is melting fast." "Home values are next."
Rates of interest on real estate
Musk's fears are rooted in the Fed. The US central bank, in response to the historic inflation, has increased interest rates since last spring from almost zero to up to 5%.
They can be bad for economic growth and asset prices because they encourage people to save more and borrow less. Higher interest rates tend to lower real estate values because they increase mortgage payments and financing fees, which leaves less money for people to invest in restaurants and offices or buy homes.
The relative attractiveness of real estate for investors is also diminished by higher rates, because they increase the yields on bonds and savings accounts.
In addition, small lenders are pulling away from lending out of fear of further bank runs. This raises the possibility of a credit crisis. A recession is a possibility, as are pressures on their portfolios and increased risks of default when interest rates are high.
Since the pandemic, remote working has become more popular. This poses a risk to commercial property values. The decrease in commuters affects the occupancy of office buildings and commercial sites, such as shopping centers and entertainment venues. This makes them less profitable for investors.
The commercial real estate sector is particularly affected by a painful combination of lower asset prices, increased borrowing costs and tighter lending from regional banks. This industry is heavily dependent on debt financing provided by smaller lenders.
Musk's concerns
Tesla's CEO has made dire predictions regarding real estate for many months.
Musk stated on Fox News "Tucker Carlson Tonight", in April, "We haven't really seen the commercial real-estate shoe drop." "That looks more like a shoe, than an anvil."
The billionaire said that the damage to the real estate portfolios was minor but will become a major problem as customers decide to cancel their leases or refuse to renew them, or even go bankrupt.
He also said that the house prices would likely decline, as many Americans could not afford to pay so much for a home due to increased mortgage costs.
Musk also commented on the massive amount of debt in the real estate sector that will expire over the next five-year period, and the homeowners who are facing a steep rise in their monthly payments when the fixed-rate mortgages come to an end.
He tweeted that "this is by far the biggest looming problem," in March. "Mortgages too."
Tesla's CEO spoke out about the challenges facing the housing market and what this could mean for banks earlier this month.
Musk tweeted: "The huge jump in monthly mortgage payments due to high rates of interest, clearly reduces the affordability of home ownership." Mortgage portfolios could be at risk if house prices fall significantly.
Musk will benefit if the Fed responds by lowering rates if the real estate market tanks.
He has complained that higher interest rates are effectively raising the price of Tesla cars, since they translate to larger monthly payments for car loans. He said that Tesla must cut its prices to maintain demand.
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By: tmohamed@insider.com (Theron Mohamed)
Title: Elon Musk rang the alarm on house prices and commercial real estate this week. Here’s why he’s worried about a property disaster.
Sourced From: markets.businessinsider.com/news/stocks/elon-musk-house-prices-housing-market-commercial-real-estate-fed-2023-5
Published Date: Wed, 31 May 2023 12:55:00 +0000
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