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Elon Musk Warns Homeowners About the Value of Their Homes  TheStreet



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There’s no doubt about it: Things aren’t looking so great for commercial real estate, especially for office space.

Look no further than a revised forecast issued earlier this month by a group of researchers from New York University and Columbia University, which predicts that office values in New York City alone will plummet a staggering 44% by 2029. That’s much steeper than the group’s prior prediction—issued a year ago—for NYC office values to fall 28% by 2029.

The stickiness of remote work, coupled with interest rates spiking just as many commercial real estate loans come due, is the underlying source of the commercial real estate bearishness. However, at least in the eyes of Tesla CEO Elon Musk, property declines will soon spread beyond commercial real estate.

On Monday, Musk insinuated that pain awaits the residential housing market when he tweeted that “Commercial real estate is melting down fast. Home values next.”

But the loss in demand for commercial real estate is what’s driving demand for residential real estate. People who work from home need more space at home. Sales volume is down because inventory is down. Today, home prices increased for a second straight month.

— Glenn Kelman (@glennkelman) May 30, 2023

Musk didn’t say how much he thinks U.S. home prices will fall—nor did he explain why. He also got some pushback.

On Tuesday, Redfin CEO Glenn Kelman shot back at Musk, tweeting, “But the loss in demand for commercial real estate is what’s driving demand for residential real estate. People who work from home need more space at home. Sales volume is down because inventory is down. Today, home prices increased for a second straight month.”

The idea that remote work has boosted home prices during the pandemic is supported by research published last year by researchers at the Federal Reserve Bank of San Francisco. The San Francisco Fed paper argues that upwards of 50% of Pandemic Housing Boom gains through November 2021 can be attributed to an elevated demand for “space” created by the pandemic’s remote work shift.

“Our results suggest that rising house prices over the pandemic reflected a change in fundamentals rather than a speculative bubble. This implies that the evolution of remote work may be an important determinant of future housing costs and inflation,” wrote the team of San Francisco Fed researchers.

So who is right, Kelman or Musk? The industry is fairly divided.

While national home prices have fallen a bit—down 2.2% from June 2022 according to the seasonally adjusted Case-Shiller National Home Price Index—they aren’t crashing broadly. Some markets like San Francisco (down 12.9% from its 2022 peak), Phoenix (down 8.4%), and Las Vegas (down 9.0%) have fallen sharply. However, many places in the Midwest, like Chicago, and along the East Coast, like Miami, are still near all-time highs.

Economists at firms like Zillow and CoreLogic argue that national home prices have bottomed, while firms like Moody’s Analytics and Fannie Mae think that national home prices—which rose on a month-over-month basis in February and March according to Case-Shiller—will soon flip back into correction.

Want more housing data? Follow me on Twitter at @NewsLambert.

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• Elon Musk warned this week that commercial real estate is in meltdown and house prices will slump.
• The Tesla chief blamed the Fed’s interest-rate rises for putting pressure on property values.
• Musk has explained that higher rates mean bigger mortgage costs, making homes less affordable.

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Elon Musk sounded the alarm on US house prices and commercial-property values this week. The billionaire’s warning reflects his fear that the Federal Reserve is strangling the economy and threatening to cause a needless recession.

“Commercial real estate is melting down fast,” the Tesla, SpaceX, and Twitter CEO tweeted on Monday. “Home values next.”

Interest rates and real estate

The root of Musk’s concerns is the Fed. In response to historic inflation, the US central bank has raised interest rates from virtually zero to upwards of 5% since last Spring.

Higher interest rates encourage saving over spending and make borrowing more costly, meaning they’re often bad news for asset prices and economic growth. They tend to pull down real estate prices because they raise mortgage payments and financing costs, leaving less money to buy homes with, or invest in offices and restaurants.

Steeper rates also erode the relative appeal of real estate to investors because they boost the yields from bonds and savings accounts.

Moreover, after mass withdrawals of customer deposits caused major problems at several banks this year, smaller lenders are pulling back in fear of further bank runs, raising the prospect of a credit crunch. They may also be more wary of lending given the prospect of a recession, pressure on their asset portfolios, and the increased risk of loan defaults when rates are higher.

The shift to remote working since the pandemic also poses a threat to commercial real estate values. Fewer commuters depresses occupancy levels in office buildings, and also affects traffic for commercial sites such as shopping malls and entertainment venues, making them less profitable bets for investors.

A painful mix of downward pressure on asset prices, higher borrowing costs, and tighter lending by regional banks is especially bad news for the commercial real estate industry, which is heavily reliant on debt financing from smaller lenders.

Musk’s worries

The Tesla chief has been making dire predictions about real estate for several months now.

“We really haven’t seen the commercial real estate shoe drop,” Musk said on Fox News’ “Tucker Carlson Tonight” in April. “That’s more like an anvil, not a shoe.”

The billionaire argued the damage to real estate portfolios has been minor, but would become a serious problem in the coming months as customers cancel their leases, decline to renew them – or go bankrupt.

Moreover, he said that house prices were likely to decline as some Americans couldn’t afford to pay as much for homes due to higher mortgage costs.

Musk has also weighed in on the vast amount of real estate debt expiring over the next five years, and homeowners facing a sharp rise in monthly payments once their fixed-rate mortgages end.

“This is by far the most serious looming issue,” he tweeted in March. “Mortgages too.”

The Tesla CEO zeroed in on the housing market’s challenges, and what they could mean for banks, earlier this month.

“The massive jump in monthly payments for a 30-year mortgage, due to high interest rates, obviously greatly reduces home affordability,” Musk tweeted. “Mortgage portfolios are at risk if housing prices drop significantly.”

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

He’s complained that higher rates effectively raise the price of Tesla vehicles, as they translate into larger monthly car-loan payments for consumers. As a result, Tesla has to cut its prices just to maintain demand, he said.

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