29 July 2013

Will the Internet (specifically AirBnB) Drive Up Property Prices?

Airbnb.com let's people sublet a room for one night a month or 30 nights a month. This could change the calculus people make about how much they can afford to pay for mortgage, a factor that could drive up home prices.

Airbnb is an online bed and breakfast. What makes it unique is that it lets people just "rent" a room for the night to folks who don't want to pay normal hotel rates. My daughter recently stayed in Palm Springs for only $35 a night, in a guest room of a house. The family there keeps their price lower than average in order to rent out the room every night. As a result, they pay their mortgage from airbnb revenue. Another couple she knows rents a room in San Francisco. They used to have a boarder who paid $800 a month; they now get closer to $3,000 a month for that same room, renting it out in increments of less than a week.

Airbnb has exploded. About a year ago I saw a presentation claiming that more people had spent the night in Airbnb beds than hotel beds the previous week in Manhattan.

This could drive home prices up. Typically lenders calculate your ability to buy a house based on your income, usually calculating a mortgage loan payment at between 25% to 40% of your gross income. If that monthly income should suddenly include another $3,000 in Airbnb income, that drives the calculation of sustainable mortgage payments upwards.

It is easy to say that Airbnb and its competitors could stay marginal and thus have little or no impact on property prices. That's possible but unlikely for this simple reason: markets reach equilibrium at the margin. Any given day, most people choose not to buy or sell any particular stock or home. It is only a small percentage of homes, say, that sell any given year. And the folks who buy those few homes outbid anyone else. So, it's perfectly conceivable that the new equilibrium price of homes will be driven up by buyers who have already factored in revenue they might get from Airbnb. Or maybe they already are.

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