Why the Short-Term Rental Boom is About to Bust

Now, let’s dive right in…

The blockbuster movie about the ultimate crash of the housing market – “The Big Short” – was one of the best portrayals of the 2007-2009 housing crisis.  On that I think we can all agree.

What most people don’t think of is the period that led up to the crash.

Not the weeks that led to the tipping point.

You know, where Mark Baum and his crew were kicking in the doors of the rating agencies to figure out why the market wasn’t crashing.

I’m talking about the years of overindulgence that led up to the crash.

We’ve seen that exact situation build over the last three years.

Back in 2005, I was on a family trip to the lake in Michigan.

One day, while we were out running around the lake in our boat, I wondered “how can I get one of these cool little cabins on the lake?”

My family would love it and it was only seven hours from our house in Cincinnati - the perfect long weekend spot!

I called a local realtor and asked.

The reply was short and to the point.

“You can’t… they’re all owned by the same families.”

I was told that there were about 20 families on the lake that had bought almost all the 100-plus houses to form “compounds.”

Now, these weren’t the Rockefellers or the Fords. They were the Smith’s and the Johnson’s that worked on the lines at the Ford plant.

The realtor went on to explain that the lake had been bought by the hourly workers at the auto plants.  Average wages with gorgeous compounds.

But that was going to change… and soon.

A few years later, interest rates moved higher and variable rate mortgages popped.

Suddenly, more than 75% of the lake was up for sale for 50% of the prior year’s value.

It’s about to happen again.

In March, I put Airbnb (ABNB) on my Bearish Watch List.

My outlook was based on the same story, with a twist.

You see, over the last four years or so, we’ve seen a similar movement, but people haven’t been building compounds for their families. Instead, they’ve been playing Monopoly with rental properties.

It started with everyday folks buying a small vacation spot and renting it out on Airbnb or VRBO.

Then it grew, two turned to three properties. Three to six. Eight to sixteen properties. And before you knew it, your neighbor quit their job as an attorney at Procter & Gamble (PG) to become a full-time property manager.

Now they’ve got a garage full of paper products, cleaning supplies, and replacement furniture.

That’s a true story. My neighbor left her legal career at P&G to manage her Airbnb properties. Properties that aren’t renting as much as they used to.

I’m worried because the Michigan Lakehouse situation is getting ready to play out again.

This time it’s not because buyers levered themselves with subprime mortgages. Instead, it’s a good old-fashioned turn in the market.

You see, demand for Airbnb and VRBO reservations are preparing to slow, considerably.

There are two basic themes playing out here.

First, the consumer has become more budget conscience.

We’re spending less because of two years of inflation wearing our budgets thin. Look at the slew of earnings reports from discretionary spending companies. From McDonald’s (MCD) to Target (TGT) to lululemon (LULU), the message is clear: consumers have stopped spending.

And among the first things to drop out of the budget are the extra travel and vacations. That will produce a hit to the short-term rental industry.

Second, the hotels want their business back, and they’re fighting for it.

Room rates in hotels have been moving lower as they compete with the “other” rental market.

Hotels are also packaging things nicely to compete against Airbnb and VRBO rentals, little perks, and benefits.

A bonus, regulatory forces are creating a headwind against the Airbnb and VRBO market.

Cities like New York are continuing to crack down on the short-term rental markets as housing inventory continues to get squeezed.

Even the City of Cincinnati and local communities are moving forward with new regulations against the industry. Just three days ago, the City of Hamilton proposed changes to their short-term rental programs.

cnbc headline

To date, the stock is trading 6% higher for the year. That outperforms the broader consumer discretionary sector ETF (XLY), which is trading flat for 2024. The most recent round of earnings call from consumer discretionary stocks tells the story of a slowing consumer and potentially more broadly, a slowing economy.

It’s the reason that Carnival Cruise Lines (CCL) is breaking down.

It’s the reason that retail stocks are heading lower.

And it’s the reason that Airbnb will finally start acting like I thought that it would in the beginning of 2024.

Here’s the current daily chart.

abnb stock chart

Today’s trading has the stock trading just above its 200-day moving average (blue line). That’s one of the most important trendlines for most Wall Street analysts when it comes to gauging a stock’s trend. A move below this level will put Airbnb stock out of favor with analysts.

The measure I use, a stock’s faster moving 50-day moving average (green line), turned bearish just a few weeks ago as it started moving lower.

When you back the chart out to a monthly view, you’ll note that ABNB’s 20-month moving average is just a hair below current prices sitting at $130.

This is important because the 20-month represents the technical line of demarcation between long-term bull and bear market trends.

For now, that long-term measure of a bull and bear market is the only line of support between Airbnb stock moving to $100.

abnb stock chart

The fundamental picture for Airbnb has cracks. The technical picture is fracturing. And to make matters worse, the crowd is all in on ABNB shares as sentiment remains optimistic. Investors are whistling past the graveyard as Airbnb’s stock slowly moves towards a bear market.

That combination is normally bad for any stock, which is why I’m positioning for a long-term target price of $100 on ABNB.

Here’s the recommendation that I’m following to position for that move.

Buy-to-open the ABNB January 17, 2025 $140.00 Puts using a limit price of $11.70 or better

To put this into perspective….

Let’s say that Airbnb shares drop to $125 before or on October 1, 2024. This option would reflect a value of $18.05. That’s a 54% return on the put option from a -13% drop in Airbnb stock.

As always, please make sure you understand equity option basics as well as the risks involved with trading them. If so, this long-term option should allow Airbnb’s bearish trend to generate intermediate-term profits for your portfolio.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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