Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Stagflation Is Reshaping the Vacation Rental Industry
Transcript
- Lucas: You know what I’ve been watching closely this year, Luna? The vacation rental market. Not just because summer travel is peaking right now, but because it feels like a perfect little laboratory for stagflation dynamics. Luna: Laboratory — I can see that. You’ve got high fixed costs, consumers pulling back, and yet people still need to get away. What’s the number that stands out to you? Lucas: Airbnb’s average nightly rate in the U.S. for Q2 of this year is down eight percent year-over-year. That’s according to AirDNA, the market research firm that tracks short-term rentals. Meanwhile, occupancy rates have dropped to about fifty-two percent, from fifty-eight percent pre-pandemic. Luna: Eight percent drop in rates and six percentage points of occupancy lost? That’s a double squeeze. Owners are earning less per night and filling fewer nights. Lucas: Exactly. And the cost side hasn’t gotten any cheaper. Mortgage rates are still elevated — the average rate on a thirty-year fixed is hovering around six point eight percent. Cleaning fees, insurance, property taxes — all up. So the margin compression is real. Luna: I talked to a guy last week who runs a small portfolio of cabins in the Smoky Mountains. He said his revenue per available night is down about fifteen percent from 2024. He’s thinking about selling two of his four properties. Lucas: That’s exactly the kind of story I’m hearing. And it’s not just the small operators. Even the big platforms are feeling it. Airbnb reported in their last earnings that average daily rates globally were flat to slightly down, and they’re pushing harder into what they call ‘extended stays’ — bookings of twenty-eight days or more. Luna: Right — the workcation. If you can’t fill a cabin for a week at a high rate, maybe you get two weeks from a remote worker who needs a change of scenery. But that changes the whole economics. Turnover costs drop, but you’re also committing to a lower nightly rate. Lucas: And it brings a different kind of guest. Someone who might cook at home more, use less of the premium services. The whole model shifts from ‘maximize rate per night’ to ‘maximize occupancy at a sustainable price.’ That’s a big strategic pivot. Luna: Let’s zoom out to the macro picture for a second. We just got the June jobs report — payrolls grew by only fifty-seven thousand. That’s way below expectations. And the labor force participation rate dropped to the lowest level outside of the Covid era. Lucas: Right. So you’ve got a labor market that’s cooling, which means consumer confidence is fragile. People are still traveling, but they’re more price-sensitive. They’re trading down from a beachfront condo to a lake cabin, or from a lake cabin to a spare room in someone’s house. Luna: Which is one reason we’re seeing the bifurcation in the vacation rental space. The luxury segment — high-end properties with private pools, chef kitchens, that sort of thing — is still doing reasonably well. The demand from affluent travelers hasn’t collapsed. Lucas: But the mid-tier is getting crushed. The three-bedroom house that used to rent for two hundred fifty dollars a night is now struggling to get two hundred. And that’s the bread and butter of the industry. A lot of those properties were bought during the pandemic boom when interest rates were near zero. Luna: And now those owners are facing refinancing at much higher rates. Some of them are sitting on adjustable-rate mortgages that are about to reset. That could trigger a wave of forced selling, which would put more supply on the market and push down prices further. Lucas: There’s a parallel here with the broader housing market, but with a twist. In the regular housing market, high rates are locking in existing homeowners — they don’t want to sell and give up their three percent mortgage. But in the vacation rental space, owners might be forced to sell because the cash flow no longer covers the mortgage. Luna: That’s the stagflation trap. Costs are sticky high, revenues are falling, and the exit door is expensive because financing for a buyer is also costly. So you’re stuck. Lucas: And that’s why I think this sector is a canary in the coal mine. If vacation rentals are faltering, it signals that the consumer is under more pressure than headline GDP numbers suggest. GDP grew at two point one percent annualized in Q1, but that’s backward-looking. Luna: The forward indicators — like the drop in payrolls and the labor force participation rate — tell a softer story. If people aren’t working, or are working fewer hours, they’re not going to splurge on a week in a vacation rental. Lucas: Which brings us to the workcation trend. It’s not just a lifestyle choice anymore. It’s an economic adaptation. If you can work remotely, you can stretch your travel budget by staying longer and paying less per night. That’s a stagflation-era behavior if I’ve ever seen one. Luna: We’ve talked about this before — how stagflation reshapes consumer habits. But the vacation rental industry is a really vivid example. It’s not a necessity, it’s not a luxury — it’s somewhere in between. And it’s getting squeezed from both sides. Lucas: The thing is, walking through these connections — how a drop in average nightly rates connects to a miss in payrolls, connects to the labor force participation rate — that’s exactly why we do this show. We don’t run ads, we don’t clutter it up. If that kind of clarity has been useful to you, and you want to support keeping it ad-free, you can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it’s a small way to keep the conversation going without any commercial interruption. Appreciate anyone who chips in. Lucas: Alright, back to the market. So where do we go from here? I think the next thing to watch is the summer peak — July and August bookings. If those come in weaker than expected, we could see a real shakeout by fall. Luna: Especially if the Fed holds rates steady. The next FOMC meeting is at the end of July. If they don’t cut, the pressure on variable-rate mortgages for vacation properties will keep building. Lucas: And there’s a geopolitical angle too. The headlines this week about Europe wanting to rebalance trade with China — that’s a reminder that global demand is fragile. If European economies slow further, that cuts off a source of inbound tourists to U.S. vacation markets. Luna: International travel to the U.S. has been recovering, but it’s still below pre-pandemic levels. A weaker euro or pound makes a U.S. vacation more expensive for Europeans. Lucas: So you’ve got domestic demand cooling and international demand uncertain. That’s a tough environment for any industry, but especially one that’s as sensitive to disposable income as vacation rentals. Luna: I want to come back to that Smoky Mountains operator I mentioned. He told me he’s started offering discounts for last-minute bookings and waiving cleaning fees. That’s a sign of desperation, but also of flexibility. Lucas: It’s a race to the bottom in some markets. But the ones who can pivot to extended stays, or who have properties that appeal to the luxury traveler, might be fine. The middle is where the pain is. Luna: It makes me think about the broader implications for housing supply. If vacation rentals get converted back to long-term rentals or even sold to owner-occupants, that could actually help affordability in some markets. Lucas: That’s the silver lining, maybe. But for now, the industry is in a real adjustment. And it’s one more data point supporting the idea that we’re in a stagflationary phase, not just a soft landing. Luna: Well, we’ll keep watching. Next episode, I’d love to dive into how this is affecting the restaurant industry — another sector that lives and dies on consumer discretionary spending. Lucas: Restaurants are next on my list too. Especially the fast-casual segment. But that’s for another day. For now, thanks for the conversation.