Elon Musk just predicted a coming collapse in the housing market, but we, along with many experts in the industry, including Redfin CEO Glenn Kelman say the conditions that would lead to a meltdown just aren't there.
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.”
Musk predicted a housing meltdown in response to a thread on commercial real estate from venture capitalist David Sacks.
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...inventory is at roughly two-thirds the levels it was pre-pandemic, from 2016-2019, during a strong seller’s market.”
We agree that commercial real estate is struggling right now. But 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 and they 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, very few homeowners would need to take a significant hit on their houses even if the economy further soured.
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 the current market conditions bear little resemblance to the situation that triggered the Great Recession.
How would a meltdown theoretically begin in housing? Such a scenario would likely require massive job losses on a scale not seen since at least the early days of the Obama administration. Right now, the labor market is actually unusually tight, which is the opposite of what might trigger a housing meltdown.
We are not the only skeptics of Musk’s housing take.
Benjamin Miller, co-founder and CEO of real estate investing platform Fundrise, has argued 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, 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.
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.
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,” is still buying under the next all-time high.
