The Crashers are now calling for a crash in the short term rental market to bring down house prices and housing affordability but the reality is they are likely WRONG again. What is the airbnb crash all about? What’s the theory behind the airbnb bust? What’s really going on with the short term rental housing market? In today’s episodes we discuss their arguments for an airbnb Housing Collapse and give you the reality of what’s likely to happen with the short term rental market as we help you become The Educated HomeBuyer.
✅ – Want to get connected with us or to a local expert in your market, please reach out at http://www.theeducatedhomebuyer.com/expert
Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith
Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: email@example.com ➡I N S T A G R A M ➳ https://www.instagram.com/borrowsmartjosh ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart
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For Show Notes, See Below 👇
[00:00:00] Jeb Smith, Huntington Beach Realtor: Is Airbnb, the next leg of the stool that’s gonna fall out that’s going to cause a housing crash. Last week we discussed the idea of a housing crash. In fact, we rebutted a lot of what the housing crash bros are coming out saying about a housing crash.
And now what we’re hearing, Josh, what’s all over the media, the headlines, a lot of the doom and gloomers out there, the Crashers on YouTube are talking about the Air B and Bust. How all of these short term rentals are essentially going to come to the market, driving inventory up. Then you’re gonna have an excess supply of inventory, not enough demand because of housing, affordability rates, all of those different things. And essentially that’s what’s ultimately going to crash house prices.
So today’s video, we’re going to provide a little bit of context on some of this information out there, help you understand what’s going on. So that you can make decisions as an educated home buyer. Josh, in prepping for this episode, One of the things that I was talking about was the idea that every single year there’s another thing out there that’s going to crash the housing market.
And these things that pop up are usually from the people that have missed an opportunity to buy a home for one reason or another or they’re just contrarian by nature, right? They just have a negative outlook on housing for one reason or another. And we’ve cycled through different things from shadow inventory to higher interest rates to the covid lockdown, which resulted in forbearance, and that was gonna result in foreclosures.
And then we now have higher interest rates, and then there was new construction, and now we’ve got a recession. And on top of that we got Airbnb. So Josh, Let’s break this down in a way people can understand and help make some sense of it.
[00:02:02] Josh Lewis, Expert Mortgage Broker: Absolutely. And let’s talk about the purpose of today’s episode.
I really, this is a giant nothing, the short term rental market. It’s a big market. People have made good money and I’m certain there are people who’ve piled in late chasing a buck and are going to have a bad outcome. But in terms of impact on the bigger market, it’s going to be a giant nothing. So going through today’s data, really, this is just an exercise again, in taking apart the data and showing you what it does and doesn’t say, and more importantly, how people are lying with statistics.
Like in researching this Jeb, you and I looked at three, four different things, you’re like, okay, that, that number may be accurate, but that’s crazy to spin it and present it that way or to show that it’s going to have an impact.
[00:02:47] Jeb Smith, Huntington Beach Realtor: While you’re while we’re talking about that same thing the idea of lying with statistics, what we’re doing, you read a headline or a piece of an article and it sounds really contrarian and it sounds really negative until you provide the [00:03:00] additional context.
And what happens in a lot of these articles, these videos, is they don’t provide the additional context. Is it on purpose to leave it out, to support a point? Is it a lack of knowledge understanding data? Really hard to say, but when it’s done continuously over and over again to me, It looks like they’re trying to take a topic, spin it to their narrative and make it work out in their favor.
And you do that by leaving certain things out or making the data look the way you want it to look by not mentioning the entire story. So that’s all I wanted to throw.
[00:03:35] Josh Lewis, Expert Mortgage Broker: A hundred percent. And just looking at that information and trying to help you walk through this. Us saying there is no crash coming and dissecting the data that’s being used to pitch this idea of a crash is not to tell you everyone should jump in and buy a house today. Because we’ve said a million times for the last 70 years, home prices have gone up 4.6% a year on average, not my expectation for the next four or five, six years.
Affordability is a problem. We have limited demand. We are going to have low volume. So this is not a healthy housing market. It’s not positive. I don’t expect anyone out there who wants to buy a house to sit there and be smiling, but we gotta get away from this if it bleeds, it leads. Let’s put the craziest headline, the craziest, everything on our articles, videos emails so that people will open them and they’ll be in a full-blown panic.
There is not a panic here. There’s some information. There’s some things, some good reports that we follow that had mentioned this, that partially the same market, that one of the things that one of the YouTube videos was panicking about, talking about short term rentals. Post Super Bowl said, Hey, Airbnb owners were disappointed by the Super Bowl in Phoenix this year.
By their occupancy rates, by the rates they were able to command. And some of those people who got in late and need top of market rents may decide to sell. But we’re gonna go through it. We’ll go through the details and the data, but really I just want you guys, if you’re listening and focusing.
This is just one piece of data that’s being used to mislead. And Jeb went through the 10 different ones that we’ve had in the last decade telling people don’t buy a house. We will always go back to the belief that when it is the right time in your life, in your family, and the time to buy, you should go ahead and do it.
And there is nothing telling us that a crash is coming despite the fact that we may see a protracted period of level or minor increases in home values.
[00:05:31] Jeb Smith, Huntington Beach Realtor: Yeah. And it always comes back to supply and demand, right? And the idea behind an Airbnb bust is that essentially that would lead to more supply on the market, not enough demand ultimately leading to, to lower home prices.
So Josh, the idea behind an Airbn Bust, the Airbnb crash, if you will. What’s the theory? Because I think it’s important to start with the theory and then we’ll talk about, where they think that leads us to. And then we will provide the actual statistics, the data that [00:06:00] has been left out so that you as a listener, as a viewer can make more sense of it.
[00:06:05] Josh Lewis, Expert Mortgage Broker: In a nutshell, what they’re saying is this is a bubble within a bubble. That there were people drawn to investing in properties by the ability to get much higher rents. When we look at rents, a short-term rental rate is much higher than a long-term rental. The same exact property is gonna generate close to two times as much as a nightly rental.
Now you have management, you have to work at it, you have to turn it over, you have to be communicating with the people that are coming in, help them get out, get it cleaned, all of that fun stuff. But the belief is too many people came in too late, paid too much with tenuous financing. And if they don’t get those 2x rental rates, if the economy softens, people stop traveling, then these people are gonna be distressed and in big trouble.
And there’s gonna be a glut of these homes coming to the market that, as you said, supply and demand, we now have excess supply that the market cannot absorb and will lead to much lower home prices.
[00:07:00] Jeb Smith, Huntington Beach Realtor: So they’re saying basically post covid travel has changed. Less consumer spending, traveling out there in the market on top of a lot of competition now, right? We take the Phoenix market, which is an example that we’re gonna talk about in today’s video. A lot of competition out there, which leads essentially to lower pricing because now you’ve got your neighbor next door doing essentially the same thing. You’ve got to be competitive unless you have a super unique property and doing so leads to lower rates.
And then, I guess they’re saying that 65% more Airbnbs than homes for sale in 2023. And I don’t know why that would matter at all. But we’re going to talk about all of these things because that’s ultimately the justification, or lack thereof, to back up their example in this case.
Travel has changed, Josh. Let’s be honest. And if you ever hear me talking about investing in property, I say you, you either gotta go for appreciation or cashflow. Very difficult to get both, right? Because just historically speaking, you’ve had one or the other, right?
There’s some markets out there, Midwest that doesn’t really appreciate at all. Home prices have more or less been the same for the last 20 years, and then you come to California. Average appreciation over the last 50 plus years is around 7%, so you get a lot of appreciation here. Cashflow is difficult because home prices are more expensive.
But there is this area where the two circles intersect and creates this opportunity to get both appreciation and cashflow. And it comes down to short-term rentals. And a lot of people have taken advantage of it. You personally have taken advantage of it, been able to pay your property off probably I’m guessing, way quicker than you would have otherwise because of this short term rental. That quite frankly puts you probably in a stronger financial position.
But a lot of these properties wouldn’t make sense otherwise, if we’re being completely honest, buying it as an investment because without that short term rental aspect right.
And that is a piece of the puzzle where I do believe they are accurate. That is something that I [00:09:00] do agree that most of these people wouldn’t have bought these properties if the short term rental aspect wasn’t there. But it is and they’ve been able to do it and hold onto it but the idea here, Josh, is that revenue on these properties is going to continue to go down. Therefore people are going to have to sell them, foreclose on them. I’m not a hundred percent sure where they’re going with this, but let’s talk about it.
[00:09:21] Josh Lewis, Expert Mortgage Broker: Let’s look at actual numbers here. I have a chart here from AirDNA. It is one of the good sources of data that tracks this industry. As good as you can have. It is somewhat opaque and hard to get a view inside of. But from their perspective, there were 10% more listings for short term rentals in 2019 than the year before.
2020 the panic jumps off and that drops by 11.5%. 2021, we’re coming out of it. Rates are great. Home values were starting to go up but only increased about 1.6%. 2022, last year, the first half of the year, if we remember, market was really hot. Rates were going up, but it was pushing people through this door that they were afraid they were gonna miss that window of low rates.
And it seemed to have done the same thing with vacation rentals. Cause it went up 20%. The projection for 2023 is another 8%. So you’re saying there we’ve got 30% more vacation rentals in the last 18 to 24 months at the highest prices, at much higher interest rates and facing more competition than the people that bought in 2014, 2016, 2018.
So is that painting a picture of risk? It absolutely is. I don’t want to be that investor coming in late, having a bunch of competition, having to get these top of market rents. Now, Jeb, you and I both have frequented many VRBO/Airbnb properties and they’re all over the place. I’ve been in terrible ones. I’ve been in ones that are clearly run by a big corporation, that it’s a business and it’s a glorified hotel that looks like a house that you’re staying in.
I just spent this last weekend, my birthday, we rented a place out in Needles. Which if you’ve been to Needles, California, there’s nothing worth commenting on in Needles, California other than the beautiful Colorado River.
So you either have a property facing the river, or you have a very not nice, not desirable property. Long story short, these guys have said we’re wall to wall. We have been wall to wall from February when the weather started warming up, and we are booked all the way through August. It’s not the most amazing property, but it’s nice, it’s clean, that people care for it really nicely. It’s close to the amenities that people want.
And there is a limited supply of those nice properties. Now, when we transition over, when we talk to Phoenix, Jeb, Phoenix is only probably an hour and a half away from Needles, maybe two hours. Much nicer market, but it’s a big metropolitan area that you’re gonna have a massive mix of different properties.
So there’s gonna be really nice properties that are super desirable. And then there’s people that were like I can buy this condo when the Super Bowl comes, I’m gonna make $1,500 that weekend. So there is a recipe for these people who came in late to the game, paid more for their financing in terms [00:12:00] of interest rate and they have to have those top of market rates.
So when you tell me a 30% increase in the inventory of something over the last 24 months, does that paint a picture of possible excess supply and a tough market for middle of the road or crappy properties? I think there’s a recipe for that. But Jeb, the important number to look at, they’re projecting, AirDNA is, that by the end of 2023 there’ll be less than 1.4 million short term rentals in the United States. There are 140 million homes. This is less than 1% of the market. And of that 1% we’re talking about the 150-200,000 that came in here late to the game. Really, it’s a tiny subset of a tiny subset of the market. It’s not a market mover.
[00:12:45] Jeb Smith, Huntington Beach Realtor: No. And to provide, again, a little bit of context, some of the articles I was reading, they’re using headlines, for example, from the CEO of Airbnb and warning of a booking slowdown. When you go in and you actually read the article and read the information in the article, it states that it posted its best fourth quarter ever in 2022, and saw revenue jump by 24% year over year. Hardly a bust.
So they’re still getting revenue going up in a time when less bookings are happening which shows you that there’s people out there still booking these properties. It’s not like all travel has completely gone away. Travel has changed. It’s slowed down. There’s more competition. Things that we’ve mentioned here, but we’re gonna talk about also how some of these properties, the landscape will change. They might still be a short term rental, but they also might go for a longer term rental.
And we’ll talk about how some of these loans were qualified as well, Josh, because one of the arguments out there is that. These things were bought on DSCR loans and the short term rental rates is what was used to qualify these people. So when that changes, and it has to be a longer term rental rate, that means that these people can’t keep the property, they don’t qualify anymore. They’re gonna have to foreclose, distress, blah, blah, blah.
But going back to what I said, another argument was that vacation rental management companies are reporting a 13% drop in revenue per property. But it goes on to say, however, this first quarter drop is relative. Per property revenue remains 40% above 2019 levels. Hosts are still earning more overall than they were prior to the pandemic.
And so what I’ll do is I’ll link to both of these articles in the description of this video, of this audio. So that you guys can go read ’em yourself. I’m not making up this stuff, but it’s really easy, like we said, to take a headline, spin it to make it sound really negative when in fact, yeah it might be going down, revenue is down, but where is it compared to where it was a year ago, two years ago?
It’s like saying foreclosures are up. Yeah, foreclosures are up because we had a moratorium for the better part of three years. Now they’re up but we’re still talking really minimal numbers. We’re not even back to where we were prior to the pandemic, which at that time was all time low.
So [00:15:00] again, context here, guys. Just use it for what it’s worth and make your own decisions, but understand that nothing is ever as bad as it seems, and nothing is probably ever as good as it seems either. But Josh, let’s talk about the DSCR aspect. Let’s talk about subprime loans, which is one of the things that people are talking about here, which I, again, we laugh at because it’s nothing like a subprime loan, but what’s the idea behind lending when it comes to Airbnbs or short-term rentals?
[00:15:29] Josh Lewis, Expert Mortgage Broker: Let’s go with a quick refresher course on what a subprime loan was. Credit scores down into the low 500 s. No down payment. We had teaser rates that were only good for two to three years that would have either a balloon or would adjust to a much higher rate.
So we’re gonna go through a DSCR loan and explain to you why it looks nothing like that. A debt service coverage ratio loan, DSCR, is an alternative way of qualifying for the loan. Post meltdown, in 2008, the government came back from guidelines that we must measure a borrower’s ability to repay.
One of those acceptable ability to repay measures is showing that the rents for the property exceed the monthly payment. That would show that you have the ability to repay that loan. We don’t have to document your income. So this isn’t a stated income loan. They’re not just taking your word for it, saying, Hey, trust me, I make a million dollars a month, I’m not gonna have a problem with this.
On top of that, like the least you’ve ever seen really for DSCR loans is 10% down. To make the DSCR work, in most markets, it’s more like a 20 to 30% down. You’re paying a premium interest rate. So people go to these only when they’re feeling fairly confident.
They don’t have the low credit score options. You generally have to have a good to very good credit score. So these in no way resemble a subprime loan. Also, one of the videos that we were watching said average bookings per month are down 50% in this market. So you qualified with a DSCR loan showing that full amount from last year, and now it’s down 50%.
Based off how that person manipulates all the other numbers, I don’t find those numbers to be true, but even if they were on a debt service coverage ratio loan, Lenders are pretty darn conservative on what they’re going to use as the rental rate. They’re going to look at the long term rental rate, which again, is generally about half of what the short term rental rate is.
There are a handful of lenders out there that will allow you to use the short term rental rate using data from something like AirDNA for short term rentals in this area, of this bed and bath count, that type of property. But with those, you’re talking 20 to 30% down payments. So that’s not to say that with those big down payments and a DSCR loan, that if rents were to collapse that you couldn’t have a problem.
It’s saying that this is a small subset of the market. Of that small subset of the market of people that came in late to the [00:18:00] game and used these types of loans. Like I can tell you I might do one or two DSCR loans a year. They cited an example of someone in the Smoky Mountains in West Virginia that was a loan officer that specialized in doing these for vacation rentals.
They were making a hundred thousand dollars a month. Do I believe that person exists? Probably. But they’re really good at marketing and marketing to short term rental owners if they’re able to do 10, 12, 15 of these loans every month. They’re just not a lot of them out there.
Like anecdotally, I’m not saying this didn’t happen. I have a friend who’s in Virginia and he owns short-term rentals in Florida, does loans, and he was telling me he was doing a couple of ’em a month last year. Early in the year when rates were up and these rates are even higher. And I was like, that’s crazy. You’re going into a highly appreciated market, paying above market interest rate and qualifying based off of the rents.
So do I think there’s risk there? Do I think there’s some people who made some decisions that weren’t exactly prudent? Yes, I do. But again, tiny subset of a tiny subset of the market. This is not a market mover.
[00:19:01] Jeb Smith, Huntington Beach Realtor: It goes back to how we started today’s video. Will there be some people that have to foreclose because they lose their jobs in a recession and for whatever reason I, got in late, don’t have equity. Maybe they have equity, they just choose to stay in the property and say, I’m not doing anything and end up foreclosing. Sure. That, that, that happens in every market. That will happen.
Will there be people that bought in late to the game, that put a minimal down and at some point, Just aren’t able to continue making the payment end up foreclosing on the property, losing the property. Sure. It happens every single time. Every single day.
Are there people that bought during Covid that went into forbearance and decided not to come out of forbearance and actually work with the lender and they’re going to end up in a financial position where they’re gonna have to sell their homes? Sure. Yes.
But what we’re talking about here is the same thing with Airbnb. Will there be properties where people are in distress have to do something to sell that property at less than market value? Probably. Is that going to all happen in one market bringing home values crashing down? No, it’s not.
Now, there might be more in one market than another. But when Josh mentioned the numbers earlier, you’ve got roughly, the stat you said 1.4 million short term rentals. The video I was watching said there’s a million. There’s a million out there and the idea at the moment, Josh, is that nationwide inventory for the entire US at the moment, sits around 460,000 homes.
Okay? So the idea here is that there’s twice as many short term rentals as there are available homes for sales. Therefore, that means house prices have to go lower. Explain that to me. Explain how one translates into another. I don’t understand. I don’t understand any of that. Makes zero sense to Jeb.
[00:20:51] Josh Lewis, Expert Mortgage Broker: The short term Rental industry itself is a relatively new thing. Just like Uber wasn’t possible before we all had a smartphone in our pocket. [00:21:00] Until these online platforms rose up to manage all of this, it wasn’t really possible. That doesn’t mean there weren’t vacation rentals. Vacation rentals have existed forever.
If we look again, so you say there’s a million of ’em. Number of you are a million to a million. Four, the million four here, Jeb, is available listings. Remember on Airbnb, that could be a room in my house, in my condo…
[00:21:20] Jeb Smith, Huntington Beach Realtor: but you’re gonna lose your house in your condo because you can’t afford.
[00:21:23] Josh Lewis, Expert Mortgage Broker: I’m gonna lose that and can’t afford to keep it.
So in terms of looking at this, We have less than 1% of all of the housing stock in the US is a vacation rental. Less than 20% of that is late to the game with higher interest rates with riskier loans. Those people had bigger down payments. They’ve probably benefited from some level of appreciation.
These are not likely to be foreclosures. What these are likely to be, would be a standard sale. Can that lead to an increase in inventory? Yes. But let’s say 20% of these people just sell. That’s 200,000. Do you think they all go on Saturday? They get together and they have a meeting and they go, guys, we’re all screwed. We all have to list our house now.
And now we go from 400,000 homes for sale to 600,000. No. Some of ’em are gonna figure it out Saturday. Some of ’em are gonna figure it out in six months. Some of ’em are gonna hold on and figure it out in two years. So if we say 200,000 of these people are likely to sell or lose their property, which I don’t believe is accurate.
If they were, it would take the next two to three years. And over 24 months, we’re talking less than 10,000 additional units a month. Is it additional supply? Does it prevent home prices from going up if that happens? Possibly. But it’s certainly not the wave of supply that would lead to a decrease in values.
[00:22:45] Jeb Smith, Huntington Beach Realtor: Yeah, at the moment we have a lack of supply, so more supply would be a positive thing for home buyers out there. Not necessarily for sellers because less price stability, but it also doesn’t mean a crash. One thing I think we failed to mention here, and Josh, quite frankly it’s probably because we don’t have the data on it, but how many of these properties, these short-term rentals are owned free and clear? How many of ’em are owned at 50% loan to values and could still rent on a longer term rental rate and have positive cash flow?
How many of these were bought with less than 10% down 20%? Those are the numbers we don’t know, but in knowing data, in knowing that. 42% of Americans own their homes free and clear. I have to guess a portion of these are owned without a mortgage on them. A portion of them have very low loan to values.
And with that also playing contrarian here, a portion of them have some sort of high loan value on them that puts them more at risk and more in a position where if something does change, then those people are susceptible to have to do something. But, that’s what people fail to mention is that it’s not everyone is on the Titanic sinking here, right? It’s, there’s some [00:24:00] people on it, but a lot of people are sitting on land over here watching the ship go down if that actually happens.
[00:24:07] Josh Lewis, Expert Mortgage Broker: Let me give you an example, Jeb, that kind of pulls two loops together. Another story that keeps being told is, Hey, all these hedge funds and big investment groups have bought hundreds of thousands, millions of homes. Eventually they’re gonna tire of this and they’re gonna sell them.
And I’ve said, you’re missing the point. If they sold billions of dollars of homes, they would have to put that money somewhere. They are getting a yield off that money with the monthly rents, and it is a good yield. So pulling that story back around here to short term rentals, some friends of ours that own the exact unit to ours, about eight doors down from us in Rancho Mirage, just retired.
Sold their house in Bellevue, Washington for three and a half million dollars. What they are doing is they’re gonna take that three and a half million dollars and exchange that into three free and clear vacation rentals. Nice ones, million dollar plus vacation rentals. Why? Because that yield is going to give them plenty of money to live off of, and they have a comfort level that this isn’t stocks, mutual funds, bonds, anything that I’m having to pull from my principal to pay monthly.
I’m gonna take the yield, that three and a half million, each one of those is probably gonna bring in over a hundred thousand dollars a year, who are gonna have 200 to $300,000 a year to spend while the homes can provide tax benefits, tax shelter there in terms of depreciation. They’re gonna have some expenses, some management fees. They can, write off their automobiles, any number of things.
So it is foolish to think that people are going to wake up one day and go, these don’t make sense. Airbnb’s gonna disappear. VRBO is gonna disappear. There will not be any vacation rentals. Again, small subset of a small subset of the market, unlikely to have a major impact in where things go. And on top of that, Jeb, one of the thing we didn’t go into here is where are most of these located? Most of them are heavily concentrated in vacation areas.
So it isn’t like this stuff comes onto the market. You, we talk about real estate being local. This could absolutely be a problem in an individual market. Where I’m in Rancho Mirage, much higher percentage of vacation rentals than here in Huntington Beach where we have very few. Very hard to permit ’em and there aret very many at all.
It wouldn’t have any impact on Huntington Beach. It might have an impact on Rancho Mirage. We were worried about that last year. The city changed the guidelines. You cannot do a short term rental. You can only do monthly rentals. And everyone said, oh my God, there’s gonna be so much supply coming to market.
And was there, there probably was. Like looking around, I don’t see it. But if you analyze the data, you probably would show that some people chose to go ahead and sell their property because they couldn’t get that monthly rent that they had come to depend on. And most likely the home had gone up 20, 30, 40, 50% since they bought it and there was some cash that they could yield from that.
[00:26:53] Jeb Smith, Huntington Beach Realtor: In doing that, let’s also talk about some markets that were mentioned in various articles, Austin being one of ’em, Phoenix being [00:27:00] another, Denver, San Antonio. The first two come to mind, Austin and Phoenix, because those are two of the markets that we saw appreciate the most during the pandemic.
And a lot of it was driven, quite frankly, less by, by short term rentals, in my opinion, and more by Californians. People moving outta high cost areas, moving to more affordable markets. And the people in those markets are probably saying our market’s not affordable anymore but relative to California, relative to New York, relative to some of these markets on the west coast, it is way more affordable.
And so what you had is homes being sold here in California, and those dollars transferred to quote unquote more affordable real estate and in turn driving up prices there. Also, these are red states as a whole and people leaving California moving to more tenant friendly states, more politically friendly states, if you wanna look at it like that in some ways.
So that said, Josh, let’s talk about the markets here, because there’s data mentioned in these that I think’s important to, to note. One of the things that it said is that Phoenix saw a 500% increase in seven years. Went from 10,000 short-term rentals to 18,000 today. And that’s in the last 15 months. So went from 10,000 to 18,000 in the last 15 months.
During that same time for sale listings plummeted from 14,000 to 7,800 in May. So basically short term rental supply is 2.3 times that of just housing inventory. The historical ratio is 1%, so now it’s 2.3%. Does that sort of thing have an impact there? There’s more renters than there are owners. I’m going back to the question I asked earlier. How does that affect a market as a whole?
[00:28:46] Josh Lewis, Expert Mortgage Broker: For the majority of owners, let’s go back to my example. We bought our place in 2010. It’s now free and clear. Did I care when they did away with short term rentals? When they changed the guidelines? When my rent yield decreased? I didn’t like it, but we adjusted and we do a couple of long-term rentals and make a nice chunk off of that. So are there people that will be affected? Is that reasonable? Yes.
But when we sit here and say, Hey, there’s two times the actual supply in the market, it’s not all gonna come to the market ever. But it’s certainly not all gonna come to the market at one time. What would be a massive exodus out of vacation rentals in the Phoenix market? 25% of those selling. So now we just increased, if they all came to the market at the same time, we just increased available listings by 50%.
But again, that’s not gonna happen. It’s gonna take 2, 3, 4 years to see the peak down to the new normal at 70 to 75% of that. So anyone that’s telling you, Hey, here’s this absolute number, if these people sell, it’s gonna overwhelm the market and bring this massive amount of supply, it’s not. Because that’s not how it happens.
And the funny thing is, Jeb, the people that would be in the most trouble and were most likely to lose their home [00:30:00] and will go to foreclosure, They generally fight and scratch and claw and not to keep it, but knowing I’m gonna lose it. I will do everything I can to push it off as far as possible. And that inventory doesn’t come to the market for two or three years.
We get into the issue, I believe Phoenix is a non-judicial foreclosure just like we are here in California. So those foreclosures can move fairly quickly. Although they don’t. But judicial foreclosure states, we have vacation rentals all throughout Florida. A foreclosure takes three to five years in, in Florida.
Okay, cool. 50% of these people can no longer afford their properties. They’re gonna lose them in foreclosure. They’re gonna sit there and they’re gonna collect rents for three to five years without making a payment. It’s a problem for the mortgage lender. Not necessarily a problem for the seller in the short run, the owner that’s gonna lose the property and it’s not anything that’s going to bring a massive wave of supply at one time into the market.
[00:30:50] Jeb Smith, Huntington Beach Realtor: Yeah. And I think a lot of these people, if I’m guessing, probably financed them at lower interest rates, right? Not many people are buying short-term rentals in today’s market because the numbers just don’t make sense like they did when rates were at two and half, three and a half percent on a 30 year fixed mortgage. Then the numbers really made sense. So I think a lot of these will be turned into longer term rentals.
Some of them will be sold. Like I was saying during the whole forbearance thing. My whole pitch for the better part of two years talking about forbearance on YouTube. Really where my channel started to grow was saying, Hey, listen, this, forbearance is there to protect people. Will there be a percentage of people that end up having to do something? Yes.
But the chances of all of that coming to the market at the same time in a single market driving down prices, it’s nonexistent, right? You’ve got the entire United States and real estate is local, so some pockets will experience more than others, while others won’t experience at all.
There are some markets, California, we didn’t have short term rentals here at all until about three years ago, four years ago. And even when we have them now, it’s a very small percentage of the market. Very small. In fact, most of those homes are multimillion dollar homes at this point because of where they’re located.
It’s not allowed in most condo complexes, it’s not allowed in most of the area. Therefore, any sort of issues in those where people have to sell or do something, it’s very concentrated. Plus we already have a lack of supply. It only opens up more opportunities because again, most of these people haven’t bought in the last year.
They bought years ago when money was really cheap. I think we could continue to just hammer down our point here, Josh, that I is this going to create some more inventory? I think we both agreed the answer is yes. Is it going to be a massive exodus from owning investment, owning short term rental and lead to the next housing crash because that’s the way it’s being made out in headlines. And I, I think again, we both agree that absolutely no chance that happens.
[00:32:53] Josh Lewis, Expert Mortgage Broker: Again, pull it back full circle to where we started. This conversation isn’t even just specifically about short term [00:33:00] rentals. It’s about any argument much like hedge funds. Owning large portfolios of real estate. All of these things can and possibly will present headwinds to the market as a whole. Real estate is local. If you have hedge funds owning a lot of properties in your area, I’d pay more attention to it.
If you’re in an area where there’s a ton of vacation rentals, I’d pay more attention to it. Big picture, none of these things are likely to lead to a crash. While they absolutely could be a headwind preventing the long-term, 4.6% appreciation that, that we’ve come to, to count on over the last 60, 70 years.
It’s something to be aware of, but let’s not have a hysteria. Watch your market, watch the things that impact you. And again, for most people, when the time is right for you to buy, you will buy. We are looking at a market that is not poised for a crash. Could we see corrections, especially in some of the riskier markets? Yes.
Could we see low to no appreciation for the next 2, 3, 4, 5 years while affordability corrects? Absolutely. But for the most part, Home ownership, appreciation is just one of the elements that makes it worthwhile for you over the long haul.
You’re going to pay to put a roof over your head. Rent may be cheaper in the short run, but after about a seven to 10 year time horizon of 3% annual rent increases, that’s no longer the case. So if you’re here for the right reasons, trying to educate yourself. Go out, do your own research, go through the data and research it for yourself.
Jeb and I spent probably an hour or two going through this and saying, What’s the reality of these numbers? It’s not hard to get to it. There are good data sources out there. Consider the source, do your research, come to your own conclusions and do what’s right for you and your family.
[00:34:39] Jeb Smith, Huntington Beach Realtor: No and with that, Josh, one thing I was thinking about here, as you were saying that is while the short term rental game is a new game, quote unquote, to the market, right? It was growing at X percent prior to the pandemic. The pandemic accelerated it because of travel patterns, because of, cheap money and that sort of thing. So it got above the trend in how it was growing.
But anything else, like we talked about the housing market is likely to move sideways for quite some time, right? Because we saw so much acceleration, appreciation during such a short period of time. I think the short term rental market saw something similar. I think what you’re likely to see is not a lot of new short term rentals coming to the market.
Which allows you to catch back up with the trend of where this was going. Again, a lot of it was pulled forward because of the things we saw in the market, and I think now it, there’s gonna be a calming of it, right? Just less of it out there, less competition. And some of these markets it’s going to stabilize prices.
So if you’re thinking of short term rentals, buying a short term rental, be more cautious if you’re thinking of buying a home to live in, which I think a lot of you are here for that reason. Again, we talk about it every week. Buy for the right reasons, when it’s the right time in your life, longer term, time horizon, money in the bank, comfortable with the payment, job stability, all of the things that you want.
And don’t worry about the headlines. Worry about what’s right for you. That’s really what it comes down to. Buying, right? Borrowing smart, building wealth. It’s our tagline and I forgot it. So [00:36:00] with that said, guys, let us know what you want us to talk about in the next episode.
We appreciate the comments, all the feedback. You guys are giving us a lot of support and for that we are thankful. But until next time, Adios
[00:36:11] Josh Lewis, Expert Mortgage Broker: Amigos.
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