A flood of Airbnb properties will be flooding the market

by Zain Jaffer

The Consumer Price Index (CPI) reading in mid September 2023 showed a slight increase in inflation, driven mostly by energy prices that have affected everyone. The recent eruption of war in the Middle East will definitely exacerbate energy prices. Crude oil prices have risen and are expected to rise further. Unfortunately stockpiles of the US Strategic Petroleum Reserve have been lowered and not yet fully replenished due to an earlier release by the Biden administration. So expect inflation to tick up more.

This means that at some point in the future the Fed may still further raise interest rates from the current level. Already the sudden rise in Fed rates have also impacted the thirty year Fannie Mae and Freddie Mac mortgage loans that now average around 7.5% (in some areas already 8%), roughly double what it was prior to the hikes last year. Car loans, credit card loans have been affected. Credit card interest rates now average over 20% in many cases.

In particular, for those investors who bought property to rent out during the Airbnb boom a few years ago and were financing it at very low interest rates in the +3% range, they will get impacted by an adjustable rate refinancing that brings them up to the current 7.5% range.

The problem is that with an impending recession, depleted personal savings, overextended purchases on higher credit card rates, less people are renting out Airbnb properties. So with a higher adjustable interest rate and less rental cash flow, the numbers no longer make sense. Hence they want to sell.

Unfortunately most buyers do not want to purchase at 7.5% interest, so everything is frozen except for a few exceptions.

Some states like New York are beginning to crack down. New York wants to ban rentals less than 30 days, and only allow fewer people to occupy the property at a given time. Violators may be subject to a $5,000 fine.

Once interest rates go down however, the situation may change. Ideally if a soft landing is achieved, then the vacation rental business may not be that bad and vacationers may resume their vacations in Airbnb properties. For some, the lower mortgage payments by the buyers may not be that bad. However, that is an ideal situation.

The worst situation is if the property buyers suddenly give up because mortgage rates remain high, become delinquent and get foreclosed, a lot of Airbnb properties may suddenly end up as unsold foreclosed properties with the banks. The banks themselves are overloaded with older lower yielding treasuries and vacant real estate that defaulted, and they will want these assets off their books.

This will cause the housing market to crash for a time because of the sudden oversupply with fewer buyers. It will self-correct at some point if other buyers with money or those who are okay with the mortgage rates come up to snap up the excess inventory of houses whether for residential needs or for vacation rental needs.

If the Airbnb business model or the vacation renters are no longer there, the sudden flood of properties into the market may be good for housing affordability if those properties fit the purpose of residential buyers.

SOURCES:

Personal Savings (Federal Reserve data)
https://fred.stlouisfed.org/series/PSAVERT

Credit Card (Federal Reserve data)
https://fred.stlouisfed.org/series/CCLACBW027SBOG

Unemployment (Federal Reserve data)
https://fred.stlouisfed.org/series/UNRATE