Elon Musk, the renowned entrepreneur behind Tesla and SpaceX, has once again expressed deep concern about the state of the US real estate sector. In a tweet on Monday, Musk declared, “Commercial real estate is melting down fast. Home values next.” His statement came as a response to a tweet by David Sacks, the founder of Craft Ventures, who highlighted the impending maturity of a significant portion of commercial real estate debt.
Musk has previously warned about potential cracks in the property market, particularly following the turmoil in the banking sector. He has specifically identified commercial real estate as the “most serious looming issue,” raising concerns about the possibility of regional banks experiencing a wave of defaults due to their substantial exposure to the sector.
The debt-driven nature of the industry has left investors on edge in recent months, as it grapples with a host of challenges. These include higher interest rates, tighter credit conditions, and ongoing work-from-home trends.
JPMorgan estimates that around $450 billion in commercial real estate debt, set to mature this year, could default. Additionally, Morgan Stanley Wealth Management has warned that commercial property prices could plummet by 40% from their peak, given the sector’s ongoing troubles.
The US housing market is also grappling with similar issues, which likely explains Musk’s belief that prices are on the verge of a downfall. Morgan Stanley reports that home sales have hit rock bottom due to higher borrowing costs severely impacting demand, with experts cautioning a potential 15% to 20% decline in prices.
In response to historic inflation, the Federal Reserve has steadily increased interest rates from near-zero levels to over 5% since last spring. While the rate of price increases has slowed, the combination of higher borrowing costs and steep prices poses a significant threat to demand and economic growth.
Furthermore, lenders are taking precautionary measures in anticipation of further bank runs following the collapse of Silicon Valley Bank and Signature Bank in March, triggered by a wave of deposit withdrawals. These forces are exerting downward pressure on asset prices, raising fears of potential declines in housing and commercial property values.
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