Is an Airbnb crash something that is ultimately going to happen that’s going to bring down house prices? At the moment, there’s a belief floating around the internet, primarily on mainstream media, that there’s going to be a bust with regards to Airbnb because of less people out there using them and oversupply of these properties, revenue per property dropping, that’s ultimately going to lead to short-term rental owners having to sell these properties, which is going to lead to more inventory. In theory, crashing home prices.
Lets dive into this theory in a little bit more detail, actually provide some real numbers behind it and help you make sense of how it’s likely to affect the housing market over the next couple of months to the next couple of years.
Bust or Boom Theories
There’s always been this theory out there, that something is going to crash the housing market. And quite frankly, it happened after the last housing crash in 2008. It started with the idea here that all of these banks are holding onto shadow inventory, and once the shadow inventory hits the market, that’s ultimately going to bring prices down.
And then it went from that to interest rates are going up, no one can make their payments, people are going to have to sell their properties. Then in turn, more inventory is going to come to the market, less buyer demand, which is going to lead to a housing crash. And then, we went from that to the COVID lockdown. All of these people are trapped in their properties. They’re going on forbearance. Once the forbearance ends, these people aren’t going to be able to make their payments and it’s going to result in a foreclosure, and that’s ultimately going to crash the housing market, bringing house prices down.
And from that, it’s gone to the idea that interest rates are going up, they’ve more than doubled. Home prices are at super high levels, affordability is a problem. And in turn, no one is going to buy the available inventory out there on the market. Therefore, inventory is going to build and that is going to lead to a housing crash.
And then from that, we got the idea of a recession coming. Now, we’re kind of still in the middle of the recession idea as of September 20023, because in theory it hasn’t happened yet. And a lot of people believe that employment is going to get worse. We’re going to get higher unemployment numbers. People are going to lose their jobs. They’re not going to be able to make their payments. So in turn, they’re going to have to sell their properties, which is going to lead to a housing crash.
And on top of that, now what we have is Airbnb or your Vacation Rentals. Because none of the other things have happened yet, and the crashers out there need something else to base their theory off of, they’re going with the idea that the short-term rental market is flooded with inventory, that revenue per share per property is down. Therefore, homeowners cannot afford to keep these properties, and that’s going to lead to all of this supply coming to the market, driving prices down.
How Real Estate Markets Actually Work
Now, it always comes back to supply and demand. And in the case of a Vacation Rental Bust, if you will, the idea is that all of these short-term rentals are going to come to the market, essentially flooding the inventory. And because buyer demand is at a low because of housing affordability, because of interest rates, this in turn is going to lead to lower house prices.
Well, I don’t think that’s true, but let’s start with the theory first. What is this Airbnb bubble all about? What’s the actual theory behind the idea of an Air-b-and-bust? Well, the first thing is that post-COVID travel has changed. You don’t have all of these people staying home. You don’t have all of these people out there looking to travel. For one, it’s expensive. On top of a lot of the free money that was given away has now been spent. Consumer debt is at an all time high. So there’s less people out there just spending money on travel. Therefore, less people are going to be renting Airbnbs.
In addition to that, one of the arguments is that there’s too much competition in these areas, because so many people jumped on the bandwagon of short-term rentals, there’s so much competition in these markets, that homeowners who have short-term rentals are having to lower their rates in order to entice potential travelers, which is leading to less money in their pockets. And in turn, they’re going to need to sell these properties because it no longer cash flows like it did prior.
On top of that, there’s also this theory out there that there’s 65% more Airbnbs on the market than there are available homes. Now, I don’t really understand the theory behind this idea, that because you have two to three times the amount of available inventory for rent than you do for purchase, that that’s going to lead to more people selling their property, it’s going to lead to lower house prices.
At the end of the day, it always comes back to supply and demand. So at the moment, these properties are rentals. They’re not available to purchase. In fact, at the moment of writing this blog, there’s only about 460,000 homes available in the United States. And when you go pull the data online of short-term rentals out there, there’s about 1.4 million short-term rentals. But then when you dive a little deeper into those numbers, about 35% of those are a room or a space rented in someone’s house. They’re not an actual property. So only 65% of those 1.4 million properties are actual Airbnbs, which is around 900,000 properties.
So I’m not sure why people think just because there’s more rentals out there than there are single family homes that that’s going to lead to more supply on the market. But what I will say about that theory is that if you’re in a market that has a large concentration of Airbnbs, then you’re probably a little bit more susceptible to price drops, price declines, if you will. Honeslty the group of people who are in trouble are hotels. Vacation Rentals have a huge advantage over hotels and even are comparably priced. Vacation Rentals are more likely to crash the hotel industry and put them out of business before ever having a negative effect on the house marke.
Now, also understand that yes, some of these properties are likely to come to the market over time if they’re not producing the same amount of cashflow, someone can’t keep them from one reason or another. Maybe we go back to the beginning, and talked about some of the things that crashers have wanted to believe, that unemployment is going to drive the number of people out there that can’t afford their properties higher, and they’re going to have to sell them. In the case of an Airbnb, maybe that’s the case. And therefore, these properties will come to the market.
But there’s a really, really, really 0% chance that all of these properties would come to the market at the same time. So as you see properties trickle to the market in areas that already have inventory shortages, there’s less likely to be a problem with this type of thing coming to the market. Now, I’m not saying that some people won’t sell their properties. There will absolutely be some people selling their properties, but in my opinion, there’s not enough inventory there hitting the market all at the same time in order to do any real damage.
Now, on top of that, there’s this belief that a lot of these buyers who purchased short-term rentals bought them with little to no money down or used a DSCR loan, which is a debt service coverage ratio loan, in order to qualify for these properties. So basically, in short, what that type of loan is that it allows you to buy a property with little to no money down, as long as the rents on that property exceed the mortgage amount. And by hearing that, you could see how that could lead to a problem, until you understand how those loans actually work.
Most people when buying a property and using a DSCR loan are still putting a down payment down because otherwise the debt service doesn’t work on that property. And that’s primarily because most lenders out there that do these types of loans aren’t using the short-term rental rates in order to qualify you. They’re using longer-term rental rates in order to qualify you, which means they’re using the actual rent that you would pay as a long-term tenant renting that property for 12 months versus the short-term rental rate that would be two to three times that amount.
So with that, a lot of people had to put down payments in order to make these loans work. But just like I said earlier, will there be some of these people that purchased these properties using this type of financing hitting the market? And the answer is an absolute yes. There are some people that are late to the game that bought short-term rentals at the height of the market, and due to increased competition out there and financing at higher rates, that the numbers just don’t make sense. And it wouldn’t make sense as a longer-term rental either. Therefore, they will choose to sell those properties.
But just like I said when we were talking about forbearance a couple of years ago, yes, there will be some people that can’t afford to keep their properties and they’ll put their homes on the market. This instance is no different. Now, with that said, the best argument out there is that revenue is down per property, per share, if you will. And that’s ultimately what’s going to lead to people having to sell their homes. Just like what we’ve talked about before, yes, there will be some, but people are using headlines in order to drive their narrative on this topic.
And one of the headlines that people are using out there is that the Airbnb CEO is warning of a slowdown out there in the market. And that seems like a pretty grim headline when the CEO of a short-term rental company is saying, “You should expect a slowdown.” But at the same time, while he’s saying that, you have to realize that their revenue per share jumped 24% in the first quarter, which is hardly a bust. And that’s because he’s saying a slowdown compared to where they were at the height of the market. Just like home prices, home prices are down from the height of the market, but in no way is the housing market busting. It just is what it is. It’s a slowdown because of less consumer spending out there, because there’s less people looking to travel, because there’s increased competition.
In addition to that, you have vacation rental companies out there reporting a 13% drop in revenue per property. But when you dive a little bit deeper into the article, you realize that the per property revenue still remains 40% higher than it was prior to the pandemic, and that hosts are still earning more overall than they were prior to the lockdown. So just like people out there can say that foreclosures are on the rise, foreclosures have doubled, yeah, they have gone up, but you’re comparing it to the last couple of years when there were absolutely no foreclosures. Where in fact foreclosures are also below the numbers prior to the pandemic.
There’s a book out there called How to Lie with Statistics, and this is a really good example of it. And basically what it’s saying is manipulating data to report the way that you want it to report, by either leaving certain things out or providing things out of context. And for the better part of three years, I’ve stayed away from addressing this sort of thing just because I’ve tried to give the benefit of the doubt. Maybe he doesn’t understand what he’s posting, or maybe he’s not doing it with malicious intent. But when it happens over and over again and you see things intentionally left out, it leads you to believe that it’s being done so for a reason, to drive fear. And for someone that’s been wrong for the better part of three years on the direction of house prices, you think that you would learn by now to step down and stop pushing that narrative. But the reality is it still goes on because fear drives clicks and clicks drive revenue.
But with that said, there’s another viral chart making its way around the internet that’s essentially rebutting the narrative that he’s trying to preach by providing some actual numbers from another site that mines the exact same data, basically showing that there’s not a collapse in revenue per property actually taking place, addressing the question of is it down in 2023 and saying, “Yes, revenue is down, but it’s not down anywhere close to the numbers that he’s reporting in his chart.” Actually, what we see is the average revenue decrease per property is more like 3.6% versus 40.3%. So with that said, just make sure when you’re out there watching other people, reading information online, or watching YouTube videos, you’re actually going to a trusted source that’s not manipulating things in order to push a certain narrative. Or in the case that we mentioned a moment ago, trying to lie with statistics.
Conclusion
Now, the last thing I’ll say about the Air-b-and-bust is that you have less of these properties now turning into short-term rentals, less of these things being purchased because interest rates are high, affordability is high, rents are slowing in a lot of these markets, less travel out there, the things that we talked about earlier in the video, which is ultimately going to lead to a more balanced short-term rental market over the long run.
Location always matter when purchasing your vacation rentals. We specialize in Vacation Rentals in St. George Utah and surrounding areas. Our main industry is Travel. I truly believe that hotels and those types of lodgings will go underway before vacation rental owners will be pressured to sell. Once you stay in a Vacation Rental you wonder why you ever stay in a Hotel again.
If you looking to purchase a Vacation Rental in Southern Utah reach out to us. We have real data, real income reports, real occupancy reports from our current rentals and can help you make educational decisions if owning a vacation rental is the right investment for you.
