Real estate markets across the board have been challenged with a significant inventory strain in the post-pandemic world, driving renters and buyers alike to fight tooth and nail to find places to live—all while the construction industry continues to work overtime to keep up with demand.
Several major cities across the country with large populations of renters have risen to the challenge by working to find solutions to the inventory squeeze, and one factor they’ve identified as a problem is Airbnb and similar short-term rental services. In recent years, cities have been imposing stricter regulations on Airbnb properties in order to free up more inventory in their respective markets.
New York City is the most recognizable example, with The Guardian reporting in January that a new law—Local Law 18, which was passed in 2022—would be putting new regulations in place on Airbnb that would give more flexibility to their rental market, which is notorious for its low inventory struggles. The law would require Airbnb units to be registered with the city, therefore falling under their legal definition of short-term rentals.
“Legal short-term rentals are any properties where no more than two people are hosted, the host resides in the dwelling unit, and where guests have access to all parts of the dwelling unit, according to the city,” said Gloria Oladipo, author of the article. “Under the crackdown, hosts would need to prove that they reside in the rented properties, that the home is up to safety code and other requirements that amount to a stronger enforcement of existing laws relating to multiple dwellings and permanent residencies.”
Atlanta instituted a similar crackdown in 2022, as Market Realist reported. While the city also required registration of Airbnbs, that city took it a step further by requiring permits. In addition, Airbnb owners in Atlanta are limited to having two units, one of which has to be their primary residence.
Philadelphia also took the registration step further than NYC, according to a January article from The Philadelphia Inquirer. The city requires two licenses and a zoning permit from their Airbnb owners.
All of these regulations were put in place with the intention of lessening the amount of short-term vacation rentals in these cities in order to free up more rental availability.
This poses an interesting question: If Airbnb and similar vacation rental sites have put a strain on the rental market, are investor-owned homes available for rent putting a strain on the housing market?
The facts
Recent research from NBC, using data from ATTOM Data Solutions, points to an increase in investor-owned homes on the market. The research found that the amount of absentee owners (i.e., investor-owned homes for rent) has increased since 2020 in 228 out of 307 zip codes across nine major metro areas from Seattle, Washington to Charlotte, North Carolina.
Dr. Shelton Weeks, professor of the Department of Economics & Finance at Florida Gulf Coast University, who focuses on real estate, says that absentee owners are both an issue—and not an issue.
Weeks explains that investors do pose competition for buyers in the market, but they are not a major source of inventory issues. The major problem with the low inventory struggle we’re currently facing, as Weeks states, is a lack of construction that would have created a supply to match the demand of the past 10 to 15 years.
“When I look at this, I tend to look at it from a pretty high level in terms of what’s going on within a market. What has evolved over the last decade or so is this segment in the market in terms of demand for housing that has the ability to pay a premium price. That demand really wasn’t a part of our marketplace to go back 10 to 15 years,” says Weeks. “So sure, it’s competing with other uses, but I don’t think that the answer is to necessarily restrict the investment for ownership of properties for rental. I think we need to look closely at the situation and see that the outcome that we’re seeing in our market is the result of us not adding enough supply to the marketplace.”
Weeks goes on to explain that investor-owned homes for rent do supply a necessity to the market: rental units. Especially in a time of high home prices, renting has opened the door to more opportunity within the real estate market. Absentee owners provide the essential service of rental inventory, diversifying that inventory as well.
“I think that the big thing when we look at this, obviously if you and I are out there in the marketplace today trying to buy a home, we would like for there to be less competition for the homes,” adds Weeks. “But when you take that macro view, realize that those rental homes, whether it’s short term or longer term, play an important role in the way we use our housing stock.
“And to the extent that those investors are present in our market and are supplying more capital to the market, that will ultimately send the signal—‘Hey, we need to add supply,’ and hopefully that will bring more builders and developers to the market, and we’ll expand the housing stock. Unfortunately, that’s a long-term outcome because of the lag and bringing product to the market. And as you know, the market will continue to shift, and there will be other supply and demand shocks that come along the way.”
While investors may not be causing the real estate market’s inventory strain, they are putting a strain on buyers.
What the buyers see
Barbara Wolcott, chairman and CEO of Berkshire Hathaway HomeServices Towne Realty in Virginia Beach, Virginia, shares that in her experience, investors are upping the competition buyers face.
“We have such an influx of investors, not only those who are individuals who are coming into the market, but companies that are in the market, and they have cash,” says Wolcott. “So for the consumer who’s looking for their home, that’s competition they’re always having to go up against.”
Wolcott adds that investors tend to have a tactical advantage in that they’re able to buy at or above asking price, and in cash.
In terms of buyers combating investors in the market, Laura O’Connor, president and COO of JPAR® Real Estate, says that the current rate of housing supply leaves much to be desired.
“Until there is a better supply of inventory, the struggles for first-time owners will not lessen regardless of whether they’re competing against investors or other buyers. Low inventory with high demand means offers still need to be highly competitive,” explains O’Connor. “There are some warning signs of a vacation rental bubble that may inject more homes into the inventory supply, but in the meantime, agents need to prepare their buyers to enter the market.”
O’Connor offers the following tips to help real estate professionals guide clients through the current market:
- Ensure that buyers have pre-approved financing in place and, at a minimum, pre-qualification. This step sets a solid foundation for their home-buying journey.
- Educate buyers about the various financing options available, which will enable them to make informed decisions to maximize their buying power. This includes understanding the differences between conventional loans, FHA loans, VA loans and seller financing.
- Set realistic expectations with pricing, neighborhoods and amenities. It is essential for buyers to grasp market dynamics and gain a clear understanding of what they can afford.
- Guide buyers in minimizing contingencies and accelerating the closing process. This involves addressing potential obstacles such as the sale of their current residence, inspections and financing, with the goal of expediting the transaction.
- The key to success lies in thoroughly knowing the client—their wants, needs and financial capacity. By having a deep understanding of their preferences, agents can act quickly and decisively when opportunities arise.
