Home prices will fall, commercial real estate will collapse

• Get ready for heavy pressure on commercial real estate to spill over into house prices, says Elon Musk.
• “Commercial real estate is crashing fast. Home values ​​then,” the tech billionaire wrote on Twitter.
• Investors are worried about real estate in a period of rising interest rates and tightening lending.

Elon Musk is once again sounding the alarm about the US real estate sector.

“Commercial real estate is crashing fast,” said the head of Tesla and SpaceX. “Home values ​​then.” chirp on monday.

The tech billionaire made the comment in response to a tweet from Craft Ventures founder David Sacks, who noted that a large portion of commercial real estate debt is set to mature soon.

Musk had previously warned of the possibility of cracks emerging in the real estate markets after the turmoil in the banking sector. For example, the clean energy pioneer said commercial real estate “is by far the most serious issue looming on the horizon,” and warned that regional banks could face a wave of defaults due to their huge exposure to the sector.

The debt-fueled industry has kept investors on edge in recent months, given that it faces a host of headwinds. These include higher interest rates, stricter credit terms, and home-based business trends.

JPMorgan has estimated that about $450 billion in commercial real estate loans that expire this year could default. Meanwhile, Morgan Stanley Wealth Management said commercial real estate prices could fall as much as 40% from their peak given the sector’s woes.

The US housing market is also dealing with similar issues, which likely explains Musk’s view that prices are set to crash. According to Morgan Stanley, home sales fell to an all-time low as higher borrowing costs stymied demand, with experts warning of a 15% to 20% chance of a drop in prices.

In response to historical inflation, the Federal Reserve has raised interest rates from nearly zero to just over 5% since last spring. And while the pace of price increases has slowed, the painful combination of rising borrowing costs and rising prices threatens to weigh on demand and economic growth.

Moreover, lenders are stepping back in preparation for more bank withdrawals after a wave of deposit withdrawals knocked out Silicon Valley Bank and Signature Bank in March. These forces exert downward pressure on asset prices, adding to concerns that home prices and commercial space could take a hit.