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Airbnb’s business is booming. The popular platform reported its highest-ever revenue and profit in the third quarter of 2022, driven largely by strong demand and high daily rates. The booming vacation rental industry has attracted the attention of real estate investors and entrepreneurs who are amassing large portfolios of short-term rental properties to cash in on the boom.

“Over the past three years, short-term rentals have been a bit of a gold rush in the real estate investment world,” says Tony J. Robinson, co-host of The Real Estate Rookie podcast. He says that much like the real gold rushes of the 19th century, many investors were involved in short-term rental investments without the proper tools or skills.

“I think a lot of people who jumped in to make a quick buck are going to hold back.”

According to a Bloomberg Markets article, many of these pop-up Airbnb empires have been financed with risky loans secured not by large down payments or borrowers’ salaries, but by potential future rental income. If the short-term rental boom stops, it could cause serious problems for these investors and the banks that finance them.

Few experts predict a full-blown housing crash like the one we saw between 2008 and 2014, in part because home mortgage lending standards are much higher now than they were in the years before 2008. However, loans supporting these vacation rental entrepreneurs. could rest on more shaken ground.

Instead of being flooded with underwater foreclosures, the real estate market, particularly in areas dependent on tourism, could be oversupplied by the very investors who were snapping up homes during the pandemic: Airbnb hosts.

“A wholesale dump of Airbnb homes nationally would be necessary to create a crash,” James Peters, assistant dean of accounting, economics and finance at Maryville University’s John Simon School of Business, said in an email interview.

Demand far outstrips supply in the current housing market, where many home buyers have shopped for months and made several offers without success. “There are fewer than 800,000 homes in the entire country,” Peters adds, according to the St. Louis Federal Reserve. “That inventory level is still really low.”

If Airbnb investors sell their properties and free up supply, in other words, it could offer some relief to anxious homebuyers.

Supply overload

Airbnb hosts continue to add new listings at an alarming rate. The total supply of short-term rentals in the U.S. reached 1.38 million in September, up 23% from the same period last year, according to AirDNA, an industry analytics firm. A whopping 62% of active listings have been added since 2020.

Geographically, these new lists are not evenly distributed. The Phoenix and Scottsdale market saw 44% year-over-year growth, while Las Vegas saw a 36% increase in new listings. Meanwhile, these Sun Belt cities are now experiencing the fastest falling home prices in the country, down 4.4% and 4.8%, respectively, from their peaks in the spring, according to the AEI Housing Center.

The number of short-term rental listings in small towns and rural areas nearly doubled between May 2019 and May 2022, according to a joint report by AirDNA and STR, another analytics firm. This follows a trend of US travelers seeking fresh air and solitude during the pandemic, but could be disastrous for Airbnb hosts in these areas if travel patterns return to normal.

“Rural areas are at risk,” says Peters. “The lack of alternative uses for large rental properties, with hot tubs, games rooms and rural views, makes them particularly vulnerable. A small apartment in New York can always be converted back into a (usually less profitable) long-term rental, but that’s difficult with a seven-bedroom house in rural Georgia.”

Robinson, who manages 30 properties across the country, shares similar concerns about a potential slowdown in demand for rural vacation rentals.

“If I tried to turn my Tennessee property into a long-term rental, I wouldn’t make any money,” he says. “So I would be motivated to sell.”

Easing demand, increasing control

Hosts themselves have already started sounding the alarm about Airbnbbust, based on a host’s viral tweet in October.

This coincided with a backlash against Airbnb from guests and media pundits who complained about high prices, confusing fees and frustrating rentals. Airbnb CEO Brian Chesky recently addressed these concerns on Twitter, saying “I heard you loud and clear” and promising to improve these experiences for guests.

However, due to dissatisfied guests, inflation or changing travel patterns, demand for vacation rentals appears to be softening. In its third quarter financial results, Airbnb lowered its Q4 revenue guidance. And AirDNA data shows that occupancy (the share of available nights booked) is down 1.2% year-on-year, suggesting that supply is indeed outstripping demand.

And the short-term rental industry faces other headwinds that could force many Airbnb owners to divest from their portfolios, beyond simple supply and demand.

Most recently, the New Orleans City Council passed a temporary ban on new short-term rentals in October. And the city of Palm Springs, California, a popular vacation rental destination, set a limit on the number of these rentals allowed in each neighborhood.

“There are two dangers in places where tourism is the main attraction,” says Peters. “The growing popularity and supply of Airbnbs means more competition and therefore lower prices. Second, when demand slows, such as a recession, leveraged amateur owners may be the first to sell.”

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