How the Airbnb ‘gold rush’ could affect the home buying market

Airbnb business is booming. The popular platform reported its highest revenue and profit in the third quarter of 2022, due in large part to strong demand and higher daily fees. The booming vacation rental industry has caught the eye of real estate investors and entrepreneurs, who have been amassing large portfolios of short-term rental properties to cash in on the boom.

“For the last three years in the world of real estate investing, short-term rentals have been something of a gold rush,” says Tony J. Robinson, co-host of The Real Estate Rookie podcast. Similar to the real gold rush in the 19th century, he says, many investors were drawn into short-term rental investing without the right tools or skills.

“I think a lot of people who jumped in looking to make a quick buck will back down.”

According to a article in Bloomberg MarketsMany of these emerging Airbnb empires were financed with risky loans backed not by large down payments or borrower salaries, but by potential future earnings from the rentals themselves. If the short-term rental boom were to collapse, it could spell serious trouble for these investors and the banks that financed them.

Few experts predict a total housing collapse like the one we saw between 2008 and 2014, in part because credit standards are much higher for residential mortgages now than in the years before 2008. However, the loans backing these vacation rental entrepreneurs could rest on deeper ground. unstable.

Instead of being inundated with foreclosures by underwater homeowners, the real estate market, particularly in areas reliant on tourism, could be oversupplied by the same investors who were snapping up homes during the pandemic: Airbnb owners.

“Nationwide, it would take a massive sale of Airbnb homes to create a crash,” Jaime Peters, associate dean for accounting, economics and finance at the University of Maryville John E. Simon School of Business, said in an interview by email.

Demand far exceeds supply in today’s real estate market, where many homebuyers have been searching for months and have made multiple offers without being successful in purchasing. “There are fewer than 800,000 homes on the market in the entire country,” according to the St. Louis Federal Reserve, Peters adds. “That inventory level is still really low.”

If Airbnb investors were to sell their properties and free up the supply, in other words, it might offer some relief for homebuyers in a hurry.

An oversupply

airbnb hosts keep adding new listings at a breakneck pace. Total US short-term rental supply reached 1.38 million listings in September, up 23% from the same period last year, according to AirDNA, an industry research firm. An astonishing 62% of active listings have been added since 2020.

Geographically, these new listings are not evenly distributed. The Phoenix and Scottsdale market saw a 44% year-over-year increase, while Las Vegas saw a 36% increase in new listings. Meanwhile, these Sun Belt cities are now experiencing some of the fastest declines in home prices in the country, down 4.4% and 4.8%, respectively, from their spring peaks, according to AEI. Housing Center.

The number of short-term rental listings in small towns and rural areas nearly doubled between May 2019 and May 2022, according to a joint report by AirDNA and STR, another analytics firm. This follows a trend of American travelers seeking fresh air and solitude during the pandemic, but could prove disastrous for Airbnb owners in these areas if travel patterns return to normal.

“Rural areas are in danger,” says Peters. “The lack of alternative uses for large rental mansions, with hot tubs, game rooms and panoramic views in rural areas, makes them particularly vulnerable. A small apartment in New York City can always be converted back into a long-term rental (usually less profitable), but that’s tough with a seven-bedroom mansion in rural Georgia.”

Robinson, who manages 30 properties across the country, shares similar concerns about a potential slowdown in demand for rural vacation rentals.

“If I try to convert my Tennessee properties to long-term rentals, I wouldn’t make any money,” he says. “Then I would be motivated to sell.”

Soften demand, increase scrutiny

The hosts themselves have already started sounding the alarm about a “airbnbust”, based on a viral tweet from a presenter in October.

This has coincided with a backlash against Airbnb among guests and media pundits, who have complained about high prices, confusing rates and disappointing rentals. Airbnb CEO Brian Chesky recently addressed these concerns on Twitter, saying “I heard you guys loud and clear” and vowing to improve these experiences for guests.

However, whether due to guest discontent, inflation, or changing travel patterns, the demand for vacation rentals appears to be waning. In its third-quarter financial results, Airbnb lowered its fourth-quarter revenue forecasts. And AirDNA data indicates that occupancy (the proportion of available nights that are booked) has fallen 1.2% year-over-year, suggesting that supply is outpacing demand.

And the short-term rental industry faces other obstacles that could cause many Airbnb owners to dump their wallets, beyond simple supply and demand.

The New Orleans City Council recently passed a temporary ban on new short-term rentals in October. And the city of Palm Springs, California, a popular vacation rental destination, has placed a limit on the number of these rentals allowed per neighborhood.

“In areas where tourism is the main attraction, there are two dangers,” says Peters. “The increasing popularity and supply of Airbnbs means more competition and therefore lower prices. Second, when demand slows, like a recession, leveraged hobbyist owners are likely to need to sell first.”

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