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Is the housing market on the verge of a “meltdown?”
While that question has bedeviled the real estate industry for the last several years, the doomsday camp just added a famous business leader to its ranks: Elon Musk.
Musk offered his take on the housing market Monday, writing on Twitter — the social network he bought last year — that “commercial real estate is melting down fast. Home values next.”
Commercial real estate is melting down fast. Home values next.
— Elon Musk (@elonmusk) May 29, 2023
Musk predicted a housing meltdown in response to a thread on commercial real estate from venture capitalist David Sacks. And as is the case with anything Elon Musk does, his tweet quickly drew wider attention. Within a day, it had more than 1,300 retweets and more than 10,000 likes. Many of those responding seemed to share Musk’s view.
But real estate industry experts this week weren’t convinced that Musk — who has famously sold off his own residential real estate and claims to be sleeping on friends’ couches — actually knows what he’s talking about when it comes to housing.
Perhaps most notably, Redfin CEO Glenn Kelman jumped into the conversation Tuesday afternoon, arguing that commercial real estate is suffering from a loss of demand — which isn’t a problem in residential real estate right now.
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
In a second tweet, Kelman — who is an active Twitter user and has turned to the platform in the past to debunk misinformation — said that “inventory is at roughly two thirds the levels it was pre-pandemic, from 2016-2019, during a strong seller’s market.”
In other words, Kelman was arguing that residential real estate is still experiencing a seller’s market now, the implication being that a meltdown doesn’t appear imminent.
Other real estate professionals agreed.
In a conversation with Inman Tuesday, Byron Lazine — a broker and founder of BAM — said that he’d defer to Musk on topics such as space travel to Mars or how to run Tesla. And he agreed that commercial real estate is struggling right now. But he also said that when it comes to the residential market, “it’s pretty easy to get caught up in the headlines.”
“The homeowner today is so much stronger today than the homeowner in 2008,” Lazine, who was among those to quote-tweet Musk, said.
• 42% of homes do not have a mortgage
• 85% of current mortgages are below 6% fixed
• 2023 trending all-time low for new listings, worsening inventory crisis
For home values to “melt down” in this environment the US economy’s “mild recession” would have to be worse than the… https://t.co/LqmzjWfExP
— Byron Lazine (@ByronLazine) May 30, 2023
Lazine went on to tell Inman that homeowners today have more equity than they did during the Great Recession. Many don’t even have mortgages, and most of those who do have interest rates that are far below what lenders currently offer. As a result, Lazine continued, few homeowners would need to take a “meltdown price” on their houses even if the economy further soured.
Lazine also said mortgage credit was nine times more available at its pre-Recession peak than it is today, meaning money is simply less available and more regulated than it once was.
On top of all of that inventory remains low, which has been a perennial problem in the housing market lately.
All of which is to say that in Lazine’s opinion, current market conditions bear little resemblance to the situation that triggered the Great Recession. Moreover, most homeowners today stand on relatively firm footing.
Asked how a meltdown could theoretically begin in housing, Lazine said such a scenario would likely require massive job losses on a scale not seen since at least the early days of the Obama administration. But Lazine pointed out that right now, the labor market is actually unusually tight, which is the opposite of what might trigger a housing meltdown.
Lazine wasn’t the only skeptic of Musk’s housing take.
Benjamin Miller, co-founder and CEO of real estate investing platform Fundrise, also quoted Musk’s tweet and argued that “there is a significant and fundamental difference” between commercial and residential real estate. In Miller’s view, the housing market right now “is simply undergoing the typical economic cycle of every recession.”
No, there is a significant and fundamental difference. Commercial office is like the mall industry, suffering from permanent obsolescence.
Housing is simply undergoing the typical economic cycle of every recession. https://t.co/mV525a131c
— Benjamin Miller (@BenMillerise) May 30, 2023
In an email to Inman Tuesday, Miller expanded on his tweet, arguing that “Musk’s opinion seems disconnected from the housing activity we are seeing on the ground.”
“In fact, housing prices have been increasing since the start of this year,” Miller added.
Miller went on to say that in every recession, “prices fall lenders pull back.” That in turn causes prices to fall even more. Lenders’ pullback this time around has been even more significant thanks to the failure of Silicon Valley Bank in March, Miller also said. These conditions explain some recent data about the housing market, but don’t necessarily indicate a coming “meltdown.”
And in any case, like Lazine, Miller believes current conditions are simply different from those that led to the great recession.
“The much more conservative lending practice resulting from the 2008 financial crisis has sheltered the housing market from most of the downturn,” he said. “Borrowers have much higher credit scores, purchased with much more equity, and generally locked in long-term interest rates, which means the housing market is much healthier than most other sectors. Not to mention the strong demographic tailwinds driving continued demand for housing from millennials.”
Economic experts have also generally been skeptical in recent months that some sort of housing meltdown is coming. And on Tuesday, Realtor.com analyst Hannah Jones told Inman in an email that “unaffordability” is a major theme in the market right now. In that light, whenever affordability improves, “we see a corresponding uptick in buyer activity, suggesting that there is considerable pent-up buyer demand.”
“Many buyers are waiting on the sidelines, ready to jump in as housing costs approach their budget,” Jones continued. “This is likely to play out over the coming months with buyers trickling into the market as home prices continue to adjust.”
Jones added that supply and demand issues have been a theme in real estate for a long time, and while activity may be low at the moment, a low-supply dynamic “will keep pressure on the housing market.”
Jones did not explicitly mention Musk, but the picture she painted of the housing market — with demand high and supply low — is hardly one on the brink of collapse.
Others online appeared to agree. Though many of Musk’s followers seemed to share his opinion, a number of those who identified themselves as housing professionals pushed back on Twitter.
This from the guy who invested over $100m in CapEx in SpaceX buildings in LA and built a parking structure but leases the HQ. Elon tech smart but not RE smart. https://t.co/crWgNCYn5x
— Multifamily Developer (@multifamdev) May 30, 2023
Still, Musk is not real estate’s only prophet of doom these days.
Over the weekend, for example, Dave Burt — whose famed investing during the Great Recession was chronicled in the book and movie The Big Short — told CNBC that the real estate market could be facing a major correction. And he thinks flooding from climate change could trigger that correction.
“Our base case correction scenario leads to home value losses of about $800 billion in aggregate terms,” Burt said. “So a pretty meaningful hit even to a $40 trillion market.”
And last week, JPMorgan Chase CEO Jamie Dimon suggested that banks with exposure to commercial real estate could be in for a rough ride.
The comments from Burt and Dimon have to do with specific types of calamities, but the point is that there are people out there who think real estate is about to enter choppy waters.
Asked about doomsayers such as Musk as well as consumers waiting for a crash, Lazine suggested it might be a result of FOMO, or fear of missing out.
“Because of the one major crash that we had in the 2000s, nobody wants to be the guy who buys too high and misses out on the chance to buy at historic lows,” he said.
But Lazine also pointed out that housing has consistently risen over the last four decades, even factoring in the Great Recession. The takeaway, then, is that there’s always a new all-time high in the future.
“Anyone buying in this market,” he said, “they’re still buying under the next all-time high.”