Crowds press together in the streets of New Orleans as people gather to see the city’s festivities, but this year, there’s something different about the tourists. This year, instead of staying in the city’s hotels, more tourists are pouring into residential areas after using an app to quickly book a home for the week.
Airbnb, founded in 2008 as an online marketplace for short-term rentals, has seen its business grow exponentially in the last few years. In 2014, rooms available through the site jumped from 300,000 in February to more than 1 million in December, outpacing many of the largest hotel groups in the world. In May of 2016 Airbnb had almost 1.4 listings on the site and raised its revenue projection for this year to more than $900 million.
But the site impacts more than just hotel chains. As more investors, not just homeowners, use the site to rent out spare rooms — and even spare couches — it strains the supply of rental houses.
This is especially true in a place like New Orleans, where rising home prices have caused serious affordability problems. Home prices have risen 46% since Hurricane Katrina hit, according to an article by Katherine Sayre for The Times-Picayune.
Besides the number of lives lost, the most tangible impact the hurricane had on the city was the demolition of its housing stock, where 26% to 34% of its housing was lost or damaged, according to an article by Allison Plyer for The Data Center. The Center’s “The New Orleans Index” was the most widely used means of tracking rebuilding efforts in the months and years following Hurricane Katrina.
As of February 2016, Airbnb had a total of 3,621 active listings in New Orleans, according to data from Inside Airbnb, a non-commercial set of tools and data that shows how Airbnb is being used in different cities around the world.
Of course, there would seem to be a correlation between the rise in home prices and the gains in the app’s popularity, however, correlation does not always equal causation.
In order to truly understand the app’s effects, or lack thereof, you have to look deeper.
One letter circulating on Facebook entitled “Dear Airbnb Renter!” talks about what it sees as the dangers of Airbnb.
“The spread of tourism into residential neighborhoods is pushing out the people who live there,” the letter stated. “When landlords can get so much more for a property on Airbnb they no longer want to rent to actual working New Orleanians. Even residents that own their home are finding it difficult to pay their taxes because of the rising property values.”
That kind of outcry has reached lawmakers. In a letter sent on July 13 to Federal Trade Commission Chairwoman Edith Ramirez, several prominent senators expressed their concern. Sens. Brian Schatz, D-Hawaii; Elizabeth Warren, D-Mass, and Diane Feinstein, D-Calif, stated that they are especially concerned that short-term rentals are not only making housing more expensive in certain communities, but also making it harder to buy a house in the first place.
“We are concerned that short-term rentals may be exacerbating housing shortages and driving up the cost of housing in our communities,” the lawmakers write in their letter.
“Theoretically, as the supply of something goes down, we would expect the price of it to go up, and this is true for residential housing in a given city or town, assuming demand stays constant,” said Jennifer Connolly, University of Miami assistant professor of political science.
“Generally speaking, many cities have restrictive zoning codes that allow residential buildings only up to a certain height or number of floors; this is essentially a local government limit on the overall supply of housing,” she continued.
“When investors come in and take residential units off the long-term market in order to use them as short-term rentals, this further reduces supply. Economic theory would suggest that in such a scenario, prices, or rents, would increase,” Connolly concluded.
Connolly suggests another solution that could help solve the affordability crisis some cities face; however, this plan is not without its own set of problems.
“One way to address this is to ease building codes such that residential buildings could have more floors and more total units, say allowing apartment buildings to go up to 10 floors instead of three or four floors, but there is still the possibility that investors would then purchase or lease any additional residential units that such changes to the building and zoning code would create and use those units as short-term rentals,” she said.
As of May 6, 2016, the number of residential listings on MLS in New Orleans was 6,998, and the number of multi-family listings was 527.
Of the Airbnb rentals in New Orleans, 2,606 are entire homes or apartments rented out, instead of single rooms. Of the rentals where an entire house or apartment is rented out, 80.5%, or 2,099, are listed as high availability, which means they are available most of the year.
This is an indication that the owner most likely does not live in the home, whereas rentals with low availability mean that the owner probably lives in the home, and only rents it out at certain times when they won’t be there.
To put that in perspective, if all the Airbnb listings in New Orleans that had the entire home leased out and also had a high availability were put on the market, listings would increase by nearly 30%.
For their part, local real estate agents report a booming business, whether people are buying to live in houses or buying to rent them out.
“I think the market’s pretty good down here, actually,” said Lynn Arceneaux, a real estate agent in New Orleans’ French Quarter.
Several real estate agents in the area, in fact, insisted that they had never thought twice about Airbnb, or its effect on the market.
“Most of the government regulation of home-sharing is taking place at the local level, though the home-sharing companies, Airbnb being the most well-known, may lobby state governments to pass less restrictive policies that pre-empt local ordinances,” Connolly said.
“We have seen this in other policy areas, and state-level policies are typically justified on the grounds that they ‘even the playing field’ across the state and allow for continuity, creating a more business-friendly environment,” she said.
Although an argument can be made that homes with low availability are helping homeowners earn extra income and therefore helping the economy, the same cannot be said of the high availability listings, since these are run more as a business.
Of high-availability rentals where the entire property is rented out, about 49.9% are owned by hosts with multiple listings on Airbnb. The likelihood that these are investors, not owner-occupiers, is high.
Other cities facing a housing shortage are starting to set their sights on Airbnb, including San Francisco, which is currently attempting to ban short-term rentals in the city.
“Both Santa Monica and Los Angeles have included the protection of the housing supply and a desire to prevent the affordable housing problem from getting worse as reason for the regulations; they have each approached the problem in very different ways,” Connolly said.
Despite these regulations, however, some approaches don’t do much to limit Airbnb’s effect on the affordable housing market.
“Santa Monica’s ‘30-day-minimum’ approach limits the ability of homeowners to rent out their units while they travel away from home, a practice that doesn’t threaten affordable housing or take units off the permanent long-term housing market, but this approach does not limit the ability of an investor to purchase or lease a unit and then use it 100% as a short-term rental property; the investor just has to do so in 30-day increments,” Connolly said.
“In reality, the Santa Monica ordinance serves to protect hotels from home-sharing competition more than it protects units from being taken off the long-term market,” she said.
The second problem with this approach lies in the consequences for violating the regulations. In many cases, they are not strong enough to prevent Airbnb users from continuing to rent out their homes.
“The fines for violating the Santa Monica ordinance are not high enough to significantly deter the behavior,” Connolly said. “For instance, a rental operator in Santa Monica was recently fined $3,500 for illegally renting five residential properties within the city.
“Given the potential profit margins of short-term renting, such a fine may not deter investors from continuing to engage in short-term rentals of fewer than 30 days,” she said.
Los Angeles, however, has proposed stronger regulations to solve the affordable housing problems presented by Airbnb.
“The proposed Los Angeles regulations allow homeowners to rent out their properties while away on a short vacation, but the regulations do protect the permanent housing supply by limiting the total number of days a home or apartment can be rented to a maximum of 180 days per year,” Connolly said.
“Assuming that the fines or penalties for not complying with the ordinance are high enough to serve as an effective deterrent, this makes the purchase or lease of a property solely to be used as a short-term rental much less appealing to investors as their investment would sit empty, bringing in no revenue, for at least half the year,” she said.
Connolly explains that the policies being enacted in Los Angeles are the best way to protect affordable housing and prevent investors from buying up too much of the market to use as short-term rentals.
“If local governments want to protect the housing supply from being converted to short-term rentals, and thus pushing home prices up, policies such as Los Angeles’ 180-day limit on short-term rentals discourage investors from taking these residential properties off the long-term market as the potential profit is now greatly limited,” she concluded.
It remains to be seen whether New Orleans will resort to such local regulations to fix its housing availability problem. In the meantime, the city’s many Airbnb rentals continue to serve visitors looking for a discount in the Big Easy.
THE UPSIDE OF AIRBNB
Airbnb can constrict housing supply, but there are plenty of potential positives for homeowners, which also affect the industry. A recent article for the National Association of Realtors by Carolyn Schwaar outlined several benefits.
For one thing, rental income is likely to help homeowners afford their mortgage payments, especially in hot housing markets. As homes appreciate in value, owners get to pay higher taxes but don’t see any financial gain unless they sell or refinance. Short-term renting can give homeowners the opportunity to stay in their homes longer.
When they do decide to sell, broker-owner Carla Muss-Jacobs of Buyers Agent Portland said that homes on the market can get a higher price if they have rentable features such as a finished basement with its own entrance, or an already-established Airbnb enterprise.
And Jeanne DuFort , a sales associate with Coldwell Banker Lake Country, said potential buyers might be drawn to a neighborhood after renting in the area and experiencing the surroundings firsthand.
The app is also helping bring buyers into the second-home and retirement-home market earlier than they may have been able to otherwise, DuFort pointed out in the article. Buyers planning to retire in the near future may be able to buy a home and rent it out until they are ready to move into it.
AND A REALLY BIG DOWNSIDE FOR LANDLORDS
With the rise of Airbnb, landlords of single-family rentals face an added headache: How do you know if your renters are sub-letting?
Most rental contracts would forbid this, and for good reason. The careful vetting landlords go through before they turn over the keys to a property could be totally circumvented if their tenants decide to go the Airbnb route. And insurance policies typically don’t cover sublets, so anything that happens to a property, or a person on that property, during that time frame becomes a liability for landlords.
Then what can landlords do? Searching the site is not only time consuming for landlords who own multiple properties in multiple cities, but may also be fruitless considering the opaqueness of actual property addresses.
Online forums for landlords advise keeping close tabs through drive bys and talking to neighbors, but the overall tone was decidedly pessimistic. In the world of Airbnb, landlords are usually the last to know.