Airbnb’s business has been booming. Due to high demand and higher daily rates, Airbnb reported its third quarter 2022 profit and revenue records. Real estate investors and entrepreneurs have begun to accumulate large portfolios of short-term rentals properties in order to cash in on this boom.
Tony J. Robinson, cohost of The Real Estate Rookie podcast, says that short-term rentals have been a “gold rush” in real estate investing over the past three years. He says that short-term rentals were similar to the gold rushes of the 19th century. However, investors did not have the right tools or skills to make this investment.
“I believe a lot people who jumped in to make quick bucks will back out.”
Bloomberg Markets reports that many of these new Airbnb empires were funded by risky loans, which are not backed by large down payments, borrower salaries, or future rental income. These investors and banks could be in serious trouble if the short-term rental boom collapses.
Few experts can predict a housing crash as severe as the one that occurred in 2008-2014. This is partly because residential mortgage lending standards are now much more strict than they were in years prior to 2008. But the loans that support these entrepreneurs in vacation rental could be on even more unstable ground.
The property market, especially in tourist-dependent areas, may not be overwhelmed by foreclosures by underwater homeowners. Instead, it could become oversupplied by Airbnb landlords who are the same investors that bought houses during the pandemic.
A wholesale dumping of Airbnb homes would cause a crash at a national level,” Jaime Peters (assistant dean of accounting and economics at Maryville University’s John E. Simon School for Business) said in an email interview.
The current housing market is characterized by a high demand and low supply. Many home buyers have searched for months and made numerous offers without being able to purchase a property. Peters adds that “there are less than 800,000. homes on the national market.” “This inventory level span> is still very low
It could be a relief for homebuyers who are overwhelmed by the possibility of Airbnb investors selling their properties to free up inventory.
A glut of supply
Airbnb hosts continue to add listings at an alarming rate. According to AirDNA, an industry analysis firm, the total short-term rental inventory in the U.S. was 1.38 million listings in September. This is 23% more than the same period last year. Since 2020, 62% have been added to active listings.
These new listings are not distributed evenly geographically. There was a 44% increase in the Phoenix and Scottsdale markets year-over-year, while Las Vegas saw 36% more new listings. According to AEI Housing Center, these Sun Belt cities have seen their housing prices drop by 4.4% and 4.8% respectively from the peak in spring.
According to a joint report from AirDNA and STR (another analytics firm), the number of short-term rentals in rural and small-town areas almost doubled between May 2019, and May 2022. This is a result of U.S. travellers seeking solitude and fresh air during the pandemic. However, it could be disastrous for Airbnb landlords in these regions if travel patterns resume normal.
Peters says that rural areas are at risk. They are particularly vulnerable because there is no alternative use for grand rental mansions with hot tubs, games rooms, and expansive views in rural areas. An apartment in New York City is easily converted into a long-term, less-profitable rental. But it’s difficult to do so with a seven-bedroom home in rural Georgia span>
Robinson manages 30 properties in the country and shares similar concerns about a slowdown in rural vacation rental demand.
He says, “If I tried to convert my Tennessee properties in long-term rentals I wouldn’t make any money.” “So I would be motivated .”
Softening demand, increasing scrutiny
Hosts have begun to raise alarms about an “ Airbnbust “, based on a viral Tweet from a host in Oct.
This has triggered a backlash from guests and media pundits against Airbnb, who have complained of high prices, confusing fees, and poor rentals. Brian Chesky, CEO of Airbnb, addressed these concerns via Twitter and stated that he had heard them loud and clear and promised to improve the experience for guests.
Whether it’s because of disgruntled customers, inflation, or changes in travel patterns the demand for vacation rentals is softening, Airbnb has lowered its Q4 revenue forecasts in its third quarter financial results. AirDNA data shows that occupancy, the percentage of nights booked that have been booked over the past year, has fallen 1.2% year-over-year. This suggests that demand is outpacing supply.
The short-term rental market is facing other headwinds than simple supply and demand.
New Orleans City Council passed a temporary ban in October on short-term rentals. The city of Palm Springs in California, which is a popular destination for vacation rentals, has set a limit on how many of these rentals can be allowed per neighborhood.
Peters warns that there are two dangers in areas where tourism is the main draw. “The rising popularity and supply Airbnbs has meant more competition, and thus lower prices. Amateur owners will be the first to have to sell .”
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