"Of the four million Airbnb hosts out in the world, one-tenth are considered "Superhosts""
Yes, 400,000.
Each superhost has 10, 20, 30 houses...each with a mortgage.
Avg price 500k
Avg downpayment 7% (35k)
This is a ticking time-bomb...a repeat of the 2008 fiasco. twitter.com/govttrader/sta…
1) AirBnB was originally designed as a way for people to rent out their home (or parts, like individual rooms) when not in use.
2) AirBnB hosts then realized that you can take out a mortgage to buy a 2nd property with very little money as a down-payment, then rent it out on AirBnB and make enough to both cover the mortgage payment, and make a small profit.
3) Hosts also realized that you can long-term lease a home (house or apartment), and again rent it out on AirBnB and also cover your monthly rent and make a profit (but this time, with even less money down..just 1st months rent and security deposit).
4) Then Hosts got really greedy, and did this many times over...taking a significant % of housing supply off the market, and converting it all into make-shift hotels. These are AirBnB "super-hosts."
5) The above business model makes sense from a pure profit perspective, but ignores the social cost of converting housing into hotels - because staying in a hotel (or AirBnB, which is essentially a distributed-hotel) costs significantly more than a long term lease / mortgage home-ownership. Travel has always been more expensive than staying at home (surprise surprise, the travel industry is very profitable).
6) Reducing the supply of housing increases the price of remaining units....this increases housing prices for everybody who wants/needs to buy/lease a home. Basic Supply/Demand economics.
7) All this real estate / housing was built/purchased using bank loans...where lease/rent and mortgage payments are used to fund the loan payments.
8) The entire business from original bank loan to the individual renter model makes sense from a pure profit perspective, so long as occupancy rates remain stable. However, if occupancy rates were to fall off quickly, these "super-hosts" (also referred to as "rent seekers" because they profit from renting assets like housing) will find themselves with large monthly lease/mortgage payments, and no income to pay them. The large hotel chains like Hilton and Marriott are already seeing this and begging for a govt bailout.
9) When this happens en-masse, as it is now, banks globally will see a HUGE drop in loan payments....Hundreds of Billions of $$ cascading thru the system just stopped flowing.
10) Now the banks are in trouble, because the entire system is based on money flow being continuous, and this becomes a systemic problem with no natural solution other than mass defaults. Banks can only exist with a steady flow of loan payments...that's the whole game.
11) The next step is either bank failures, or central bank bailouts. Central Banks primary purpose is to protect the banking system, so of course there will be massive bailouts, similar to, or even bigger than the 2008 bailouts.
12) Central Banks are not forward looking...they are reactionary. This means they wait for financial disaster to occur, and THEN they step in to stabilize the system after "enough" financial pain has materialized that might injure the large banks to the point of failure.
13) Remember, the Central Bank's job is to protect the large banks...NOT YOU
14) So what does the bailout look like? Central Banks will buy the bad real estate loans from the banks, or possibly just lend the banks money at zero interest for years to fund the holding of all these assets, allowing the banks to slowly write-off / transfer / sell the assets thru the foreclosure process, which will take a number of years (just like post-2008).
15) So, who gets hurt? The greedy host who used "too much" leverage. They lose everything....they are now bankrupt. Owning 1 home with a mortgage/lease is already a little risky. Lose your job/income source and you probably can't pay your mortgage/rent (this is happening now because of the economic shutdown to slow the virus). AirBnB was designed to help these people offset some of their housing costs...seems like a great idea! Doing this multiple times over (as the super hosts have) is a recipe for disaster...in the financial markets this is called "investing with leverage" and has been the cause of every financial blowup for the last century...from the Great Depression, to 1987, 2001, and 2008. Why? Because leverage works both ways. If your leveraged assets go up in price, you can then sell them, and make a profit from the loans which funded the asset purchase (this process is also called "rent-seeking"). This sounds great. But when the asset prices drop, and the income from those assets vanishes, you suddenly don't have the income to pay the loans used to originally buy the assets, then you get a "margin call" where you are forced to sell the assets (at now lower prices because EVERYBODY is also a forced seller at the same time) to fund/repay the bank loan. You probably end up with not enough money to fully repay the bank...so the bank takes your asset (house), and you still owe more money on the loan...but you are bankrupt at this point, which is the equivalent of being dead to the bank.
16) Then the bank waits and tries to sell the asset (your house) over time as prices rise, because "everybody needs a place to live."
17) The Bank Profits! You go bankrupt. Sorry...want to play again?
Welcome to 2020! Apparently, the world learned nothing from 2008. Maybe this time will be different?
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