Deflating the Airbnb Bubble

Airbnb is one of the most admired startups to rise from the ashes of the Great Financial Crisis. Some believe a trend change is underway and the deflation of the Airbnb bubble is inevitable. This may serve as one catalyst to bring residential real estate values back down to earth. Indeed, the Airbnb ownership craze may be the modern equivalent to owning a vacation home in Las Vegas or Phoenix in the early 2000s. Let’s dive in and take a look at the current scenario and how the dominos might fall for this Silicon Valley Unicorn.

Acquiring Airbnb Rentals

Over the past several years, I have observed that one in five of my employees owns at least one Airbnb rental property. That is awesome! It is important to note that these were not necessarily intentional or strategic, but real estate investments that materialized with the natural progression of life events during the decade long bull market. It all started with becoming a first time homeowner – something I take pride in empowering as a business owner.

That first home made perfect sense. Single family homes in a popular markets were valued around $400,000. Buyers often received a $10,000 gift from family members and applied that to the down payment with the FHA generously lending 97 percent loan-to-value. Interest rates were around 4 percent which made for a reasonable $2,000 monthly payment including principal, interest, property taxes and insurance. These were common real estate metrics in cities like Austin, Denver, Phoenix and Tampa.

During the decade long bull market these new homeowners experienced $25k to $50k year-over-year appreciation gains. They remodeled their kitchens and bathrooms, expanded their patios, installed swimming pools or hot tubs and furnished their homes like HGTV models. Within a relatively short period of time, their home was worth $600k or even more. And during this season, they expanded their families with babies and fur babies.

Airbnb Investment Metrics

Home values were rising, rates were lower than ever, and there was meaningful equity in that first home. That was the signal: it’s time to move up and turn that first property into an Airbnb rental. Short-term bookings were yielding $750 for a long weekend and with four rentals per month they were collecting $3,000 in top line revenue. It doesn’t get much better than positive cash flow, principal reduction, and real estate values that only go up.

Few recognize this market may be about to unwind. Over the last nine months, we have seen the most fervent Federal Funds rate increase in history, tightening liquidity, and a complete breakdown in speculative markets like cryptocurrency or meme stocks. Now those short-term Airbnb bookings are yielding $600 for a long weekend and with only three rentals per month they are cash flow neutral or negative.

Liquidating Airbnb Rentals

This observed real world scenario leads to one prediction for the New Year. Every short-term Airbnb property owner – that doesn’t own a boutique beachfront or snowy slope-side property – will encounter similar deterioration of their investment metrics during the first half of this year. By summer, there will be a flood of underperforming Airbnbs listed as traditional rentals. That is the first step in the probable Airbnb unwind.

The increased inventory, accompanied by higher for longer interest rates and weaker employment data, will push rental rates down. Those traditional long-term rentals will break even from a cash flow perspective. During the second half of the year, this new generation of landlords will discover the true inconvenience of rent collection, ongoing property maintenance, and normal wear and tear.

It is possible those long-term rentals will turn over in mid 2024 and hit the market as properties listed for sale. This cascade of events may deflate the Airbnb bubble, help normalize the residential rental market, and make home ownership more affordable. Regardless of how this year plays out, Airbnb will still be an invaluable company and one of Silicon Valley's greatest Unicorns.

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