Our suspicions were correct in late March when we identified Airbnb overleveraged Superhosts as the next possible forced seller to hit real estate markets as their rental income collapsed due to coronavirus lockdowns.
The slide in rental income is shown below as weekly Airbnb bookings have tumbled during the pandemic.
About a month later, in late April, sad stories of these hosts surfaced and detailed a very troubling picture of a deleveraging wave we described in March could be nearing.
Last month, Greg Hague, who runs a Phoenix real-estate firm, said Airbnb hosts he spoke with were "desperate" to unload properties as they could not pay mortgage payments with dwindling rental income.
"There's been a flood of people. You have people coming to us saying, 'I'm a month or two away from foreclosure. What's it going to take to get it sold now?'" Hague said.
Now Redfin CEO Glenn Kelman says vacation real estate markets are "toast," mostly because Airbnb hosts are set to unload properties.
Kelman spoke with MarketWatch to discuss how Redfin is navigating in a post-corona world and what changes he sees in the housing market:
MarketWatch: Redfin has announced that the company's iBuying division, RedfinNow, will resume operations following the coronavirus-related pause. What drove that decision?
Glenn Kelman: The reason we're reopening it is because we think it's a reasonably good time to own a house. Inventory is down 25% year-over-year, and home-buying demand is almost back to pre-pandemic levels. So we're willing to take a risk again. I think we'll lower the amount we're willing to pay for a house, just to give ourselves more margin for error.
It was a harrowing couple of months. We had to ensure that the homes we had bought before the pandemic could still be sold once the pandemic had started, and you just can't forget that easily. So instead, you just lower your offers a little bit, and that gives you some leeway.
MW: Is RedfinNow introducing any new procedures because of the coronavirus pandemic?
Kelman: I feel like what's changed about our approach in iBuying specifically is just more about margin. You always knew that you had to have a margin for error — that there was a possibility of a downturn and that every offer you made had to account for that. But it's another thing to actually go through that. So I think there will be more margin for error, but also less tolerance for a real project. If it's a piece of work and it's going to take six months to get it back on the market, you just can't wait that long to figure out if you offered the right price to the homeowner. The market could change.
If you took a basketball shot, and six months later somebody told you whether it went into the hoop, you'd never get to be a better basketball player, right? So I think we're just being more disciplined about the kinds of homes we buy. If you make a mistake on five houses, you should not buy 5,000.
MW: Do you think that the pandemic could make iBuying more popular, since it eliminates a lot of the in-person interactions the home-buying process typically requires?
Kelman: That wouldn't be my guess. The homeowner who might be more anxious to sell their home, we're going to find out whether more of them take offers in the next few weeks. But the other part you have to consider is the money man. The people who are providing capital for iBuyers may have a different appetite for risk on the other side of this. If iBuyers all come into the market at the exact same margin they were at two or three months ago, I think our acceptance rates are going to be really high.
But my guess is that they're going to price the risk into their offers. And I don't know how consumers are going to react. When we make offers, if we give ourselves just a little more room for all the risks that we're taking, will people still accept it?
MW: You mentioned earlier that there's been a resurgence in home-buying demand — what is driving that?
Kelman: Probably the bifurcation of the American dream. It used to be that working-class folks could reasonably aspire to buy a house. And now I think buying a house has really become a privilege, and the privileged class is doing better in this pandemic than the people who work in restaurants and perform other in-person services. So unemployment is going to be bad for one part of America; for another part, it isn't as bad. And so that's the part that's buying a house.
And maybe the other dimension of this is just that there's been an affordability crisis for so long. There's structural reasons that there aren't enough homes for enough homes in America. There is just a large number of people who have been trying to buy a house for two, three, four years, especially in really expensive markets. And if this pandemic is an opportunity to do that, with less competition, you're going to take it.
MW: What's your take on the state of secondary markets and vacation markets right now?
Kelman: Toast. Those are going to be in tough shape. There's a whole economy that was built around the liquidity there that Airbnb provided. You could get pretty deep into debt and still have somebody pay your mortgage every month because Airbnb and other travel websites were so good at finding someone to rent it out. And I don't think many of those folks have the reserves that Marriott or that Hilton does.
Investors who own Airbnb properties are looking for immediate liquidity. At some level it's Redfin, Zillow and Opendoor picking up where Airbnb left off. If they can't get cash flow through one website, they've got to sell it through the other.
MW: Some have suggested that the coronavirus pandemic could lead to a migration out of major cities, especially ones like New York that were hit hard by the outbreak. What's your take on this?
Kelman: It's on like Donkey Kong. There's going to be a major move. That was already underway just because of the affordability crisis. People are leaving New York for Philadelphia and are leaving San Francisco for Sacramento and even Phoenix. Seattle was starting to lose people to Tacoma, which is just down the street.
I think some of it is about consumer wariness where we're living in close quarters with other people. But most of it's about employer flexibility. Employers that were really stuck on whether to let people work from home have gotten completely unstuck. And if you can work for Goldman Sachs, but not in New York, if you can work for Amazon AMZN, but not in Seattle, well, why would you pay the premium?
To sum up Kelman's comments, overleveraged hosts are about to flood the real estate market with properties they can no longer afford because rental income to service mortgage payments has collapsed in the pandemic. He then suggests the virus will force people out of big cities, seeking suburbs and rural communities.