In the last couple of months, there has been a lot of talk about crashing markets, failures in short-term rentals, the housing bubble, and other related conversations.
What’s really happening right now? Is the crash finally upon us, or are things, as always, more complicated than that?
If you’re looking for a quick answer, short-term rental markets are not crashing, but there are important caveats to that statement. Let’s go through it in detail.
Why are we even discussing a short-term rental collapse? This story begins with a tweet from Nick Gerli. In July, he pointed out that some Airbnb markets are struggling mightily, and he used that data to suggest that Airbnb is struggling across the board. He further suggested that a massive sell-off could happen, lowering housing prices across the country.
Is there merit to this claim?
Yes and no.
Let’s start with the raw data. Gerli pointed out that Airbnb revenue in Austin, Las Vegas, and Phoenix is low, and he’s right about that. All three cities have seen more than a six percent decline from the previous year, and overall Airbnb revenue in all three cities is down by as much as 50 percent per unit. Those are big losses and could lead to massive housing sales in each city.
Here’s the catch. Three cities hardly represent the whole of the Airbnb market, and Airbnb itself is only a portion of the total short-term rental market.
Even though those three cities (and about a dozen cities overall) are all seeing serious Airbnb revenue decline, the national market paints a different picture. Overall Airbnb revenue has increased so far in 2023. In fact, the national market is up a full 70 percent since 2019. Sure, there have been some ups and downs along the way, but if you’re looking at a national picture, Airbnb isn’t collapsing at all right now.
The doom and gloom take on Airbnb fades even faster when you consider the rest of the short-term rental market. Excluding Airbnb entirely, short-term rentals have grown in 2023, following a long-term trend of growth dating back to 2017 (excluding the extraordinary outlying year of 2020).
As an example vacation rentals (again excluding Airbnb) have seen growth throughout the year, and if current trends hold, the market will increase by 1.49 percent over the course of 2023. That’s not astronomical growth, but placed in the middle of a decadal trend, it’s healthy and promising.
Keep in mind that numbers are going up in terms of rental revenue and the number of rented properties. So, this isn’t just a case of inflation masking an otherwise obvious downturn in the market.
Current projections expect vacation rentals to slowly plateau for the rest of the decade, with total rentals and rental revenue comfortably enjoying modest growth to the top of the plateau.
The reason for Gerli’s original tweet was to show why housing markets might take a dive in the second half of 2023. If you pay close attention to these things, the housing bubble has been on the verge of bursting for the past two years or so.
Yet, housing prices continue to go up, and no bubble burst has occurred.
At the end of the day, there are two forces dictating housing prices: interest rates and housing supply. Typically, when interest rates are high, housing prices decline to compensate. After all, you can only afford so much in a monthly mortgage payment. If interest is pushing that payment up, then the principal on the house has to come down, or you can’t buy it. That holds true for everyone.
But right now, things are a little different. High-interest rates are actually pushing housing prices higher because of a unique situation. After the 2008 crash, interest rates fell through the floor, and many homeowners and investors were able to lock in long mortgages at near-zero interest rates.
Now that interest rates are so much higher, many investors and owners don’t want to part with their low-interest assets only to take on a much higher interest rate for a new property. In other words, the interest rates are pressuring people to hold onto properties, and that appears to be true whether those properties are short-term rentals or not.
Gerli suggested that a crash in Airbnb revenue would force many owners to sell, as revenue probably isn’t justifying the cost of those properties anymore, and in the select cities where that is the case, you might see a localized impact on housing prices in general.
Partly, that’s because localized markets are stratified when compared to each other. Just look at California home prices east or west of the Sierra Nevadas for a clear example. Extend that comparison to Mississippi, and it’s clear that there is no single housing market — nor is there a single short-term rental market.
On top of that, Airbnb doesn’t represent enough of the total market to dictate national trends. A sudden increase in housing inventory in Phoenix, Las Vegas, and Austin would be a drop in the bucket compared to national averages. These Airbnb trends simply cannot shake the broader outlook.
By the numbers, short-term rental markets are not crashing. More specifically, some local markets are crashing, but it’s not a national trend. As a result, these localized crashes aren’t large enough to buck national trends.
There are two lessons that are easy to learn from this whole situation. First, the local trends for any housing or rental market are far more important than national averages these days. If you’re looking to make an investment in rental properties, you need to localize your data as much as possible in order to make an informed decision. Make sure you have a good market, use tenant screening services to ensure good clientele, look at sound properties, and that you can afford some volatility.
Second, the best experts in the business have been unable to predict housing prices for the past few years. The impending crash continues to be a no-show. This doesn’t mean that housing prices can’t drop. Instead, it means that we’re in uncharted territory, and traditional projections simply aren’t working. Base your investments on solid fundamentals rather than trying to time a market that absolutely no one perfectly understands right now.