There continues a steady beat calling for the undoing of the U.S. housing bubble and the undoing of short-term rental marketplace Airbnb (ABNB 0.75%) as a result. Indeed, as interest rates have risen over the last two years, pricing many would-be homebuyers out of the market, Airbnb stock has exhibited some wild volatility.
Despite some distressing developments in the U.S. housing market, though, Airbnb's business has actually been quite resilient. Unfortunately, a possible "pop" of the housing bubble isn't quite as simple as some claim it will be.
How does Airbnb make money?
First, let's consider how Airbnb (and most of its peers like Booking Holdings) make money. Hint: It isn't from home prices, at least not directly.
The ability to list all sorts of accommodations, including rooms in a home or apartment the owner inhabits themselves, has changed how many real estate investors (and homeowners) think about their properties. It hasn't completely disrupted the traditional hotel industry (many of those businesses are doing just fine). Rather, Airbnb's rise has come just in time for a secular shift in consumer activity, one in which travel and experiences are highly valued, setting off a post-pandemic travel boom.
Airbnb primarily earns fees when a host lists a property for rent and a guest books that property for a vacation or other shorter-term rental need. These fees tend to be variable, largely dependent on the value of the booking (the higher the rent, the more money Airbnb collects from the host and guest). Thus, the health of Airbnb's business is contingent on supply and demand for accommodations on its site and app, not on home prices directly.
There's already a housing 'crisis'
Now, back to this housing bubble and coming crisis: One could argue the crisis is already well underway. There is a vast amount of data from which to craft a narrative that fits whatever point one wants to make, but here's a very brief overview of what's going on.
- The median value of homes sold in the U.S. (the middle of the data set when home prices are arranged from least to greatest) sits near all-time highs, at nearly $413,000 in September 2023, according to data provided by Redfin. This was a more than 2% year-over-year increase and up nearly 50% from five years ago.
- As the U.S. Federal Reserve has raised short-term interest rates to fight inflation, interest rates in general have been on a tear, sending the rate on a 30-year mortgage to over 7.5% in October 2023 (the highest in over two decades). That compares to historic lows of below 3% during the worst of the pandemic in 2020 and 2021.
- The supply of homes for sale has continuously fallen since 2019. Redfin data suggests just two months of housing supply is listed for sale on the market, up from pandemic lows of about 1.5 months but still far below the three to four months of supply pre-pandemic.
These data points are interrelated, interacting with each other and causing general home and property affordability to plummet across the U.S. Complicating matters is a general migration away from high-cost markets, such as California and New York, to lower-cost markets, like the Southern and Southeastern U.S. So far, these effects haven't dented Airbnb much, as its revenue and resulting profitability -- both generally accepted accounting principles (GAAP) net income and free cash flow -- have soared. If home values were to come crashing down, is Airbnb at risk?
Data by YCharts. TTM = trailing 12 months.
Airbnb is resilient but not totally immune
This "great migration" away from high-priced cities that heated up during the pandemic has been dramatic enough to raise home values in historically cheaper markets like Texas and Florida. However, it hasn't been so dramatic as to drop the value of property in places like California and New York.
Cash buyers leaving behind their homes in big cities and scooping up new homes -- and perhaps a rental property to boot -- in cheaper markets are often blamed for this effect. And many of those rentals get listed on Airbnb.
If this migration slows and home supply and demand were to "normalize," perhaps home values could come crashing down. However, for that to happen, it's clear that a larger supply of homes is needed. Some markets -- like New York, which recently put registration requirements on Airbnb hosts -- think this can be achieved, in part, by reeling in the short-term rental market.
The jury is still out regarding whether this alone will solve the problem, but I don't believe anything is ever so simple. Lower mortgage rates that stimulate more homebuying interest, alongside the construction of new and affordable homes, would provide the biggest impact, in my opinion.
At the end of the day, though, the fact remains that Airbnb doesn't make its money from property values. It makes money from the peer-to-peer activity on its site. More activity means more fees, and robust demand for travel means the value of nights booked on Airbnb (and, thus, the amount of Airbnb fees per transaction) stays elevated. It's also worth noting that Airbnb certainly isn't confined to the messy U.S. housing market, either.
Granted, home values and resulting property owner activity would most certainly affect this money-making ability. For example, if home values started to show signs of imminent decline, hosts might choose to sell their rental properties, which could limit supply on Airbnb. Thus, Airbnb could be in for some turbulence. But what else is new? It's been a wild ride since the company's late 2020 initial public offering (IPO).
Airbnb is a cash-gushing machine right now, and all indications from management are that its globe-spanning operation will continue to churn out a high level of profitability for the foreseeable future. The stock still trades for a premium (37 times trailing-12-month earnings per share, or 22 times free cash flow), but peers like Booking do, too -- and have the long-term track record to warrant it. Despite worries over a U.S. housing market bubble, I continue to rank Airbnb a solid buy for investors looking for a long-term holding.
