How Airbnb Will CRASH the Housing Market

Nobody is paying attention to something that could finally burst the Ducky Long bubble in the U.S. housing market. Everyone is worried about the housing market crashing. Stocks have gotten crushed this year; bonds have pummeled. The concern is that real estate is next.

People point to a few data points when they make the argument of why the housing market in the United States is about to crash. The median U.S. home price has increased by over 40 percent since the spring of 2020. In the spring of 2020, you could have bought the median U.S. house for 322 thousand dollars. That same house today would cost 455 thousand dollars, based on data from the U.S. Federal Reserve.

Next, they point to how the borrowing cost to purchase a new home has absolutely skyrocketed recently—the fastest increase in decades. The rise in interest rates for mortgages has increased the monthly mortgage payment on a four hundred thousand dollar mortgage from under 1,700 dollars at three percent rates all the way to nearly 2,700 dollars at current mortgage rates of seven percent.

As if this wasn't bad enough, add on the fact that it is highly probable that the U.S. will enter a nasty recession in 2023. All of these signs clearly point to the housing market being on shaky territory. This combination of elevated home prices, rising interest rates, and a recession is a recipe for a sharp decline in home prices.

However, I think there is one ticking time bomb that could be the hypothetical needle that finally bursts the U.S. housing bubble: Airbnb. In this video, we're going to examine why the trend of people buying houses solely to be used as Airbnbs could be finally what causes the crash that people have been waiting a decade for. Let's get into the video, but first, make sure to like this video and subscribe to the channel because it's my goal to make you the smartest person in your friend group.

Airbnb has come a long way from its humble beginnings in 2007. The founders of Airbnb started the platform by buying inflatable mattresses and charging people to sleep on the floor of their apartment. Now, Airbnb had 357 million nights booked on the platform throughout the world last year. If you aren't familiar with the platform, people can book overnight accommodations in spaces that are owned by so-called hosts.

At first, these bookings consisted of hosts renting out an extra bedroom or even just a couch for a guest to sleep on. Airbnb got it started as a way for hosts to make a little bit of extra money renting out unused spaces in their existing residence for guests. It was a cheaper alternative to pricey hotel rooms. As the platform got more and more popular, the demand for even larger spaces increased. Instead of wanting to just rent out a couch or a spare bedroom, customers wanted their own entire apartment or even a single-family house.

The House of Airbnb saw a profit opportunity and was more than happy to meet that demand. Before long, hosts realized they could make a ton of money by renting out an entire house or apartment instead of just extra spaces in the house they already lived in. This started the trend of people buying houses for the sole reason of listing it on Airbnb.

The first wave of people that bought houses for use on Airbnb made a ton of money. If you wanted to book an entire house on Airbnb, your options were rather limited. As a result, the relatively few listings of entire houses on Airbnb had pricing power. In economic terms, demand was larger than supply. This meant that the rent that someone could make listing a house on Airbnb could be double, triple, or even quadruple what the rent could be if it had been listed as a traditional long-term rental property.

Just search in any city, and you will see that many of the listings on Airbnb are for single-family homes. To really understand why this trend of people buying houses to use as Airbnbs really took off, you have to understand how money is made investing in real estate. The most common metric real estate investors use to evaluate a real estate investment is called cash-on-cash return.

The math behind it is simple. Let's walk through an example using a hypothetical real estate investor named John. John has worked really hard at his job and has been able to save up some extra money, and he wants to invest it in real estate. Let's say the house that John buys costs a hundred thousand dollars. Now John doesn't have the entire one hundred thousand dollars, so he has to go to a bank for a loan.

The bank agrees to lend John eighty percent of the value of the property or eighty thousand dollars in this case. So this means John has to put down twenty thousand, and the bank will give him a loan for the other eighty thousand that he needs to buy the property. Voila! Now John can buy the property.

Let's say John uses this property as a traditional long-term rental property. He signs a one-year lease with the tenant. This means that the tenant gets to live in the house for one year in exchange for monthly rent. Let's say that the monthly rent is one thousand dollars in this case, or twelve thousand for the entire year.

So John gets twelve thousand dollars in rent for that year. That entire amount doesn't go directly into John's pocket in the form of profits; he does have expenses to pay. Repairs on the house, lawn care, snow removal, property taxes, and of course the monthly payment on the loan he took out to purchase the property.

At the end of the year, after paying all those expenses, John is left with two thousand dollars in what is referred to in real estate investing as cash flow. In order to calculate John's cash-on-cash return, we take that two thousand dollars in cash flow and divide it by the monthly amount of money that he personally put down to purchase the property. By doing the simple math, we see that John's cash-on-cash return is 10. Not bad at all!

However, like nearly all investors, John wants to get the highest return possible. He watched a YouTube video about someone who made a ton of money listing a property on Airbnb, so he gives it a try. Instead of the twelve thousand dollars a year in rent, John is able to get thirty-six thousand dollars a year in rent by listing the house on Airbnb.

As a quick aside, the shorter someone stays in a property, the more expensive it is on a per-night basis. That's why it's more expensive for you to live in a hotel room for a month than what you would pay in rent or your mortgage. Because of this concept, John is able to get a lot more rent per night because he's renting it out in shorter-term stays on Airbnb.

Let's say, after expenses, John's cash flow for his Airbnb was twenty thousand dollars. Doing the same math as before, we see that John's cash-on-cash return is a whopping 100—way better than the 10 cash-on-cash return he got from using the house as a long-term rental.

Now you see why people were highly motivated and incentivized to purchase houses and list them on Airbnb. The short-term rental craze reached a peak over the past two years, and understandably so. Hosts on Airbnb were printing cash. People hadn't been able to travel for a bit, and they couldn't travel internationally. The average American had excess savings due to government stimulus and record stock prices. Consumers wanted to travel and were willing to spend a ton of money on it.

Airbnb hosts were absolutely printing cash. An entire new crop of so-called influencers popped up, dedicated to teaching people how to invest in Airbnbs, here on YouTube and other social media platforms. The biggest of which is Robuilt, who had been able to amass a following of over 200,000 subscribers through teaching people how to invest in short-term rentals.

However, things have started to shift. Warren Buffett has a saying: "What the wise man does in the beginning, the fool does in the end." This is what we are seeing play out in the market for short-term rentals. Many of the people who have bought houses to rent out on platforms like Airbnb are new to it, having just started in the past 12 to 18 months.

Unfortunately, many of these new entrants to the market will likely be forced to sell at a loss or, even worse, go bankrupt. Here's why: over the last two years, the real estate market has been booming. Record low interest rates led to one of the hottest housing markets ever. Due to the super low interest rates, people could afford to pay more for houses, and this sent the price of houses skyrocketing.

The people who bought houses to rent on Airbnb had to compete against home buyers who are willing and able to pay a lot of money for the house. In many cases, the short-term rental investors were willing to outbid other buyers because they projected that they were able to make enough money from renting out the property that they could cover the high monthly payment.

Additionally, many of these people bought their short-term rental using what is called a vacation property loan. With most investment properties, buyers need to put down a minimum down payment of 25%. This is to protect the bank, which wants the money, and honestly, this requirement even protects the buyer. The more someone puts down on a property, the less debt they owe on the property relative to its value.

There is a direct correlation between the size of the down payment and the eventual likelihood of that buyer not being able to pay back the loan. However, most people don't have the cash for a 25% down payment, especially when you consider how high home prices are now. So instead, the social media influencers have encouraged people to use a special kind of loan called the vacation home loan.

With these vacation home loans, a buyer only has to put down 10% of the price of the property; the bank will lend them the rest of the money to buy the property. So many of these new short-term rental investors have a ton of debt. The more debt you have, the more likely you are to eventually not be able to pay back your loan.

Now in all fairness, using debt is pretty common in real estate investing. In fact, in order for real estate investing to really make sense in most cases from a return standpoint, you almost always have to use at least some amount of debt. This is because when you use debt, it increases the returns you generate on the property. Buying a property just in cash and without using debt will likely generate a return lower than what someone could have just earned by investing in the stock market.

By no means is it super dangerous to use debt to buy real estate. There is one big reason why rental income for long-term rentals tends to be super stable and predictable. Take a look at this chart. Rentals for long-term apartments consistently go up each and every year. Since you roughly know how much money you will be receiving in any month and year, you can rest comfortably knowing that the rents will cover your loan.

However, rents from short-term rentals are not consistent at all. The unpredictable nature of the income makes using debt to purchase a short-term rental much more risky. The unpredictable nature of the income hasn't been an issue for short-term rental owners yet. The reason for this is the economy has been booming the past couple of years. Unemployment has been low, money has been plentiful, and people have been willing to spend that money on traveling.

But now things are changing. The economy is definitely slowing, and many smart people think the U.S. is either in a recession already or will be in one soon. What is one of the first things people stop doing during a recession? Go on vacation. Many short-term rental investors made a common investing mistake. They had one great year—probably the greatest year ever—and made these assumptions that that was normal. They assume that's how things would always be year in and year out.

However, there is this concept called reversion to the mean. This means that results in any one-year period could be great, but over the long term, things are going to normalize towards the long-term average. The travel industry is cyclical, meaning that there are good years and bad years. If you're using large amounts of debt to run your business, all it takes is one bad year to put you out of business for good.

So let's go back to our earlier example of John, and let's say John bought a house to use as a short-term rental. Here, we're going to see just how quickly a short-term rental owner can run into trouble. Let's say that John's expenses to run his Airbnb are three thousand dollars a month. That consists of his loan payment, property taxes, maintenance, cleaning, and the various other expenses involved in running the short-term rental.

We also know how much cash John has in savings based on his income and expenses. In January through June, John's Airbnb is doing great; he's consistently making more in rent each month than his expenses. As a result, the cash in his bank account is growing. At the end of June, John has eleven thousand dollars in his bank account. John is feeling pretty good about this whole Airbnb short-term rental thing.

But then things start to change. In July, his income starts to not be able to cover his expenses. Maybe the economy starts to slow down and people can't travel, or maybe John got some bad reviews from guests and Airbnb isn't showing his listing to as many people. Whatever the reason, things are starting to slow down dramatically, and as a result, John is watching the cash in his bank account dwindle.

Every month his cash is going down and down. In November, he only has 500 left in his bank account after another bad month. In December, he actually has a negative balance in his bank account. At this point, John has to use his personal savings from his day job to make up the difference. But what if John doesn't have any money in his personal savings? He used all of his savings for the down payment, or maybe he lost his own job as a result of the bad economy.

If John can't cover the negative amount, he will have to sell his house or face bankruptcy and foreclosure. This example isn't purely hypothetical; it's already playing out. Realtors are already talking about how they are getting calls from short-term rental investors asking them to sell their house. This is only the beginning. Even popular tech and lifestyle YouTuber Shelby Church has run into the same problem.

She recently posted a video about how the Airbnb she bought in California is losing money. In this video, she went month by month showing how much the short-term rental is making each month, similar to our hypothetical example with John. At first, her Airbnb was printing cash, then things started to slow down dramatically. Her expenses each month were more than the money she was making on Airbnb. As a result, each month she saw the money in her account get smaller and smaller.

On top of that, she got hit with big repairs she had to make on the house. Anyone who owns a house knows these big expensive repairs are part of owning a property. The center account balance went even further down. Listen to what she had to say: "So the ending balance was negative two thousand eight hundred and twenty-one dollars, so obviously I had to dip into another one of my accounts to cover the costs. I really didn't expect that we were going to have to do that. Things felt like they were going so well in the spring, but this is the risk that you take with Airbnb."

You know, now Shelby is a famous YouTuber with 1.75 million subscribers, so she will have no problem covering the shortfall. However, what if you aren't a famous YouTuber? What if you're somebody who has five Airbnbs that you bought? You quit your job to run them because things were going so well. Now all five of them are losing money.

It won't be long until you're forced to sell them. The flood of potential short-term rentals setting the market has the potential to be disastrous for home prices. Let me explain. Home prices are determined by the basic principles of supply and demand. Think of it like this graph we have here: the price for a house is where demand meets supply. Think of it as where the line for demand crosses the line for supply in our graph here.

Here's what happened over the past couple of years: demand increased. This was due to the economy being really strong and interest rates being at all-time lows. People had the money and were able to afford to spend more to buy a house. Additionally, while demand was increasing, at the same time supply was decreasing.

There simply weren't a ton of houses available for purchase on the market. This resulted in prices increasing, as demonstrated here in our chart. Notice how the lines for demand and supply now cross at a higher price. Now, in many parts of the country, we are starting to see this reverse. Demand is decreasing. Interest rates have skyrocketed, and interest rates on houses are now at their highest level in over two decades.

As a result, it's much more expensive to borrow money and monthly mortgage payments have increased dramatically. Additionally, the stock market has fallen in value. Since the majority of would-be home buyers own significant amounts of stocks, they have less money that they can draw on for a sizable down payment.

These two factors alone would be enough to decrease demand. Add on top of these two driving factors the fact that people are worried about the economy and their job security. Many people are choosing not to buy due to economic concerns, putting even further downward pressure on demand. Given all these factors, you would think that home prices would be falling dramatically. However, prices are currently only falling a relatively small amount, if at all, in many markets, and this is because the other side of the equation is still not normalized—that is, supply.

There still isn't a ton of supply of houses on the market. This has helped keep prices from plummeting, but that could change quickly if a wave of houses that are currently being used as short-term rentals hit the market. Here are some numbers for you: according to a popular short-term rental data provider called AirDNA, there are roughly 1.06 million properties being used in short-term rentals in the United States. Compare that to the 355,000 housing units for sale in the U.S. in March of 2022, at the peak of the U.S. housing frenzy.

Let's say one-third of the current number of short-term rentals are put on the market as owners choose, or in some cases are forced to sell. This means the supply of housing on the market can more than double from the March 2022 lows, just from the short-term rentals being forced out on the market. Going back to our supply and demand chart, this could put substantial downward pressure on U.S. housing prices.

And this doesn't include any increase in supply from a normalization of how long properties are sitting on the market. It also doesn't include those who are forced to sell their primary residence due to them not being able to afford the down payment, due to the coming economic slowdown. The impact of the Airbnb slowdown gets even worse. Let's go back to our example of John.

When John bought the short-term rental, he put down 10% of the purchase price of the house and got a loan for the rest. Let's say that the house was worth 500,000 dollars when John bought it, and he owes the bank 450,000 dollars. What happens if the price of the house falls 20%? Well, that house is now worth 400,000 dollars, but John still owes 450,000 dollars. John is now what is referred to as being underwater on his loan—owing more than what the asset is worth.

This means if John has to sell his short-term rental because he is losing money, he would still owe fifty thousand dollars on his loan. The bank would come knocking on his door, demanding that money, and John will have to sell all of his properties he owns, including his home he lives in, until the bank gets their money back.

These additional properties, including John's primary residence, will add even more supply to the market, putting even further downward pressure on the housing market. The fallout from failed short-term rentals has the potential to add hundreds of thousands of units of supply to the housing market. Surprisingly, I have not heard much about this yet, but I think it's clear that this could be yet another factor that could drive home prices down.

It is important to note that real estate is local, meaning the dynamics in each real estate market are unique to that particular city. Some markets have a much larger percentage of short-term rentals than others and will be impacted much more if there is a wave of bankruptcies from short-term rentals. There are certain markets that could have much more pronounced price drops.

So there you have it! Make sure to like this video and subscribe to the channel because it is my goal to make you the smartest person in your friend group on all things investing and the economy. If you enjoyed this video, make sure to check out this other video on the channel because I'm sure you will like it too. As always, please thank you for watching and talk to you again soon.