Elon Musk sounds the alarm on real estate, warning a spike in defaults on mortgages and commercial loans could hammer banks

·3 min read
Elon Musk
Elon Musk.REUTERS/Mike Blake
  • Elon Musk has sounded the alarm on mortgages and commercial real estate.

  • The Tesla chief warned that banks could be hit by a surge in defaults and lower asset prices.

  • Higher interest rates, depressed occupancy levels, and a looming recession threaten loan portfolios.

The turmoil in the banking sector could spread to the housing and commercial real estate markets, Elon Musk has warned.

"This is by far the most serious looming issue," he tweeted on Saturday. "Mortgages too."

The Tesla, Twitter, and SpaceX CEO was responding to The Kobeissi Letter, after it outlined that a record $2.5 trillion in commercial real estate debt will mature over the next five years.

Many borrowers could default on those loans in the face of sharply higher interest rates, depressed occupancy levels, tighter financing, and pressure on asset prices as recession fears grow. Around 70% of CRE debt in the US is held by smaller banks, exposing them to major losses if those defaults occur, the markets commentary said.

In the same vein, Genevieve Roch-Decter tweeted a few days earlier that the collapse of Silicon Valley Bank was "just a blip" — and there was a "much larger timebomb" in the form of CRE loans on banks' balance sheets.

The finance guru cautioned that loan defaults could spike due to higher borrowing costs, and real estate prices could fall due to softer demand. Banks' CRE portfolios could slump in value as a result, putting pressure on lenders to raise fresh capital to shore up their finances. That's what spooked SVB's depositors, sparked a run on the bank, and spurred the federal government to take control of the lender.

"This is the real problem," Musk responded. "Many cities have high office vacancy rates. Mortgage portfolios are at risk too if housing prices drop significantly."

The tech billionaire seems worried that banks' commercial real estate loans and mortgages could tank in value. He appears concerned that higher rates, tighter lending standards, a looming recession, and the remote-working trend might weigh on demand for certain properties, pull down prices, cause a wave of defaults, and deal a heavy blow to the institutions that hold those loans.

Bill Ackman recently underscored the key role that smaller lenders play in the construction and real estate sectors. The billionaire investor and Pershing Square chief warned that if depositors pull their money out of those banks, that could hamper lending to those industries and cause a meaningful economic slowdown.

Two Wall Street titans have also sounded the alarm in recent days. Bank of America said CRE could be the "next shoe to drop" for markets and the economy, while JPMorgan suggested a surge in loan defaults could fuel $38 billion of losses in the banking sector.

It's worth noting that Musk has been complaining about higher interest rates for a while. The Tesla chief has bemoaned that they effectively raise the price of vehicles, as they increase the monthly cost of car-loan payments. As a result, automakers have to cut prices just to maintain demand, he said.

Read the original article on Business Insider