Elon Musk rang the alarm on house prices and commercial real estate this week. Here's why he's worried about a property disaster.

• Elon Musk warned this week that commercial real estate is in meltdown and house prices will slump.
• The Tesla chief blamed the Fed's interest-rate rises for putting pressure on property values.

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. "Home values next."

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.

Steeper rates also erode the relative appeal of real estate to investors because they boost the yields from bonds and savings accounts.

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.

The shift to remote working since the pandemic also poses a threat to commercial real estate values. Fewer commuters depresses occupancy levels in office buildings, and also affects traffic for commercial sites such as shopping malls and entertainment venues, making them less profitable bets for investors.

A painful mix of downward pressure on asset prices, higher borrowing costs, and tighter lending by regional banks is especially bad news for the commercial real estate industry, which is heavily reliant on debt financing from smaller lenders.

Musk's worries

The Tesla chief has been making dire predictions about real estate for several months now.

"We really haven't seen the commercial real estate shoe drop," Musk said on Fox News' "Tucker Carlson Tonight" in April. "That's more like an anvil, not a shoe."

The billionaire argued the damage to real estate portfolios has been minor, but would become a serious problem in the coming months as customers cancel their leases, decline to renew them – or go bankrupt.

Moreover, he said that house prices were likely to decline as some Americans couldn't afford to pay as much for homes due to higher mortgage costs.

Musk has also weighed in on the vast amount of real estate debt expiring over the next five years, and homeowners facing a sharp rise in monthly payments once their fixed-rate mortgages end.

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

The Tesla CEO zeroed in on the housing market's challenges, and what they could mean for banks, earlier this month.

"The massive jump in monthly payments for a 30-year mortgage, due to high interest rates, obviously greatly reduces home affordability," Musk tweeted. "Mortgage portfolios are at risk if housing prices drop significantly."

It's worth emphasizing that Musk stands to gain if real estate prices tank and the Fed cuts rates in response.

He's complained that higher rates effectively raise the price of Tesla vehicles, as they translate into larger monthly car-loan payments for consumers. As a result, Tesla has to cut its prices just to maintain demand, he said.