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.
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.
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.
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