How the Airbnb ‘Gold Rush’ could impact the homebuying market

(NerdWallet) – Airbnb’s business is booming. The popular platform reported its highest-ever revenue and profit in the third quarter of 2022, thanks in large part to strong demand and higher daily rates. The burgeoning vacation rental industry has caught the attention of real estate investors and entrepreneurs, who have built large portfolios of short-term rental properties to cash in on the boom.

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

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

According to an article in Bloomberg Markets, many of these pop-up Airbnb empires were funded by high-risk loans backed not by large down payments or borrower salaries, but by the potential future income of the rental itself. If the short-term rent boom were to stop, it could spell serious trouble for these investors and the banks that financed them.

Few experts predict a complete house crash like the one we saw from 2008-2014, in part because lending standards for residential mortgages are now much higher than in the years leading up to 2008. Still, the loans supporting these vacation rental entrepreneurs could rest on shaky ground.

Instead of being deluged by underwater homeowner bankruptcies, the real estate market — particularly in areas that rely on tourism — could become oversupplied by the very investors who snapped up homes during the pandemic: Airbnb hosts.

“On a national level, it would take a massive dumping of Airbnb homes to cause a crash,” said Jaime Peters, assistant dean of accounting, economics and finance at Maryville University’s John E. Simon School of Business in an email. email interview.

The demand far exceeds the supply in today’s housing market, where many homebuyers have spent months shopping and making multiple offers, without coming to a purchase. “There are fewer than 800,000 homes on the market nationwide,” according to the St. Louis Federal Reserve, Peters adds. “That inventory level is still very low.”

In other words, if Airbnb investors were to sell their properties and free up the supply, that could provide some relief to hurried homebuyers.

An excess supply

Airbnb landlords continue to add new listings at a breakneck pace. Total short-term rental supply in the US reached 1.38 million homes in September, up 23% from the same time last year, according to industry analysis firm AirDNA. Since 2020, a whopping 62% of active listings have been added.

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 falling home prices in the country, down 4.4% and 4.8% respectively from their peaks in the spring, according to AEI Housing Center.

According to a joint report by AirDNA and STR, another analytics company, the number of short-term rental properties in small towns and rural areas nearly doubled between May 2019 and May 2022. This follows a trend of US travelers seeking fresh air and solitude during the pandemic, but could spell disaster for Airbnb hosts in these areas if travel patterns return to normal.

“The countryside is in danger,” says Peters. “The lack of alternative uses for large mansions, with hot tubs, playrooms and expansive vistas in rural areas, makes them particularly vulnerable. A tiny New York City apartment can always be converted back into the (usually less profitable) long-term rental, but that’s hard to do with a seven-bedroom townhouse in rural Georgia.

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

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

Softening demand, increasing control

Hosts themselves have already sounded the alarm about a “Airbnbust”, based on a viral tweet from a presenter in October.

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

But whether it’s due to dissatisfied guests, inflation or changes in travel patterns, demand for vacation rentals appears to be waning. In its third-quarter financial results, Airbnb lowered its forecast for fourth-quarter revenue. And data from AirDNA indicates that occupancy rates (the proportion of available nights booked) are down 1.2% year over year, suggesting that supply does indeed exceed demand.

And the short-term rental industry is facing other setbacks that could lead many Airbnb hosts to dump their portfolios beyond supply and demand.

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

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