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How Airbnb screwed the US housing market and made $100 billion

Updated: May 20

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Airbnb's success story stands out in stark contrast to the struggles of other startups. Unlike Zillow's disastrous attempt at house-flipping, Airbnb has flourished for over a decade. Their revenue skyrocketed, tripling from $3.3 billion to nearly $10 billion. Even more impressive, they flipped profitability, going from annual losses of $4-5 billion to earning the same staggering amount. Perhaps the strongest indicator of their dominance is their resilient stock price. Unlike the post-IPO crashes of Zillow (down 76%) and others, Airbnb's shares held strong. Their IPO price of $68 per share jumped to $146, and it continues to trade above $100, currently sitting at $160. This translates to a colossal market cap exceeding $100 billion, placing them among the world's top 200 companies. Remarkably, their valuation remains reasonable with a PE ratio of 22, lower than tech titans like Apple and Google. Now, let's explore how Airbnb disrupted the housing market and emerged as a financial powerhouse.

More times than not, investors completely change the soul of a company. They make everything about numbers, growth, profit, and bottom line, and the original mission of the company often gets lost. You could argue that this is exactly what happened to companies like Google and Facebook who were both at one point fan favorites. Hearing this, you might think that that’s what happened to Airbnb, but that’s not actually the case. Even after receiving VC funding, our trio very much stuck to their original vision and mission of the company. Helping hosts earn some extra money and helping travelers save some money. In fact, Airbnb would often go above and beyond to serve their users. For example, in 2011, Airbnb ran into their first case of malicious guests. The guests had completely trashed the property, damaging the home and stealing valuable items. Airbnb could have easily shifted full responsibility to the host as Travis Kalanick Uber’s founder did in this infamous clip. But, instead, Airbnb would step up to the plate and help hosts protect against this risk. They would roll out a Host Guarantee program that would cover property damage and theft up to $500,000, and they would double this to $1 million the very next year. So, as you can see, Airbnb has for the most part sided on the moral and ethical side of things which is extremely difficult to do as a startup that’s at the mercy of investor capital.

The company’s wholesome efforts would end up growing a pretty wholesome group of hosts and travelers, but all of this would change when Airbnb became a mainstream platform in the second half of the 2010s. Nothing fundamentally changed about the platform, the founders, the mission, or even the investors, but everything would soon change about how Airbnb was used.

After seeing the rising success of Airbnb, property owners and investors sensed a unique opportunity. Instead of renting out a portion of their primary residence, why not rent out the entirety of an investment property? This would not only drive more revenue than a long-term tenant but also give property owners more flexibility over the residence. Did they want to use the property themselves for 2 weeks over Christmas? No problem. It wasn’t just the demographic of hosts that changed on Airbnb but also the demographic of guests. Originally, the demographic was primarily travelers who were looking for the cheapest accommodations they could find. Airbnb was sort of an alternative to staying at a hostel or cheap motel. But as Airbnb became mainstream, guests were no longer looking for a cheap bed to crash in. They started looking for luxury residences that they could have all to themselves. And before you knew it, Airbnb went from being the place for budget accommodations to being the place to rent out villas. And one of the main side effects of this trend is increasing home and rent unaffordability.

Renting is getting expensive:

what happens when everyday homebuyers are competing against property investors and when everyday renters are competing against luxury vacationers? Prices go way up. In fact, there’s a name for this trend, it’s called the Airbnb effect. It’s estimated that for every 1% increase in Airbnb listings, rent increases by 0.018%, and house prices increase by 0.026%. That might not sound like a big deal, but keep in mind that over the past 10 years, Airbnb has gone from 300,000 listings to 7.7 million listings. That’s an increase of over 2,400% meaning that Airbnb may have single-handedly increased rent by 43% and house prices by 62%. And the numbers are likely even higher in Airbnb-dense cities like Austin, Nashville, Seattle, San Francisco, and LA. In fact, I can speak to that from personal experience. My parents live in Austin and they recently bought a new house and decided to rent out their old house. And the first 5 to 10 people who reached out about the property were all Airbnb investors who were all willing to pay 5-10% above the asking price. My parents ended up renting to a normal family but you can see how this sort of environment can easily screw up the housing market which brings us to the question of:

Airbnflation of housing market ?

Local cities and homeowners associations are trying to do their best to control this Airbnb epidemic by limiting short-term rentals, increasing taxes and fees, and doubling down on regulation. But, for the most part, these efforts aren’t really all that effective even if enforced. Most Airbnb investors simply see these limitations and extra expenses as the cost of doing business. And in the meantime, Airbnb is doing better than ever. With hosts having to pay a 3% fee and guests having to pay a 14% fee, Airbnb is pulling in substantial revenue from every customer, unlike most tech companies. Most tech companies are only profitable because their user base is so big. Even if you’re only making $2 per user per month, if you have 2 billion users, you’re making a crap ton of money. With Airbnb on the other hand, a simple 3-night stay at $100 per night would net the company $60. So, it’s no wonder why Airbnb is arguably the most successful startup of the mobile era. And you can’t even blame them for screwing up the housing market because they were actually trying to do the exact opposite: make accommodations cheaper for hosts and travelers. But, as you might expect, over time, the market worked its way towards the path of highest profit and revenue which was investment properties and luxury rentals. And that’s how Airbnb become a $100 billion business and inadvertently screwed up the

housing market.

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