Has the Palm Springs real estate boom come to an end? A potential limit on short-term rentals might bring the region back to its secluded origins.

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Palm Springs, an upscale desert retreat nestled in Southern California's Coachella Valley, has served as a model for the consequences of implementing stricter regulations on short-term rentals, such as those offered on platforms like Airbnb, VRBO, and Vacasa.

In December 2022, the Palm Springs City Council approved a new ordinance imposing limits on the number of homes permitted for short-term rental (STR) in each neighborhood and the frequency of rentals per homeowner annually. These measures aimed to address prolonged community unrest regarding the city's burgeoning short-term rental market and the accompanying issues, notably disturbances caused by late-night gatherings and inconsiderate vacationers in residential areas. While these regulations may discourage large gatherings of noisy vacationers in the desert—once renowned as a retreat for Hollywood luminaries—they could also present an opportunity. With the market potentially becoming less frenzied and expensive, prospective homebuyers might find properties more affordable.

Troy Kudlac, the founder and president of KUD Properties in nearby Palm Desert, CA, notes the city's previous status as the top vacation rental market globally. However, he anticipates a return to a more typical vacation rental market scenario.

However, concerns regarding short-term rentals extend beyond Palm Springs. The disruption to the tourism and housing sectors has influenced homeowners' perceptions of homeownership. While some view short-term rentals as a nuisance, others regard them as a pathway to entrepreneurship or as contributors to increased property values due to revenue opportunities or the limitation on housing availability.

The notion of policies striking a balance between interests in this evolving housing market is not new, although rarely are situations conducive to comprehensive examination.

Did the implementation of these regulations diminish the value of the Palm Springs housing market, and what implications does this hold for the broader discourse surrounding short-term rentals? Several key metrics offer insights.

Before the enforcement of the new regulations, Palm Springs was recognized as a destination where homeowners could rely on renting out their properties to offset high mortgage payments, and investors could generate year-round income through short-term rentals.

This situation presented both advantages and challenges, depending on one's perspective. On the positive side, the influx of tourists benefited the economy and property values. Patrick Jordan, a broker at Bennion Deville Homes in Palm Springs, observed the rejuvenation of neighborhoods due to the surge in short-term rental usage. Additionally, it raised the standards for local hotels vying for the same clientele.

However, since the introduction of these regulations, some real estate agents have observed shifts in the market.

Kudlac suggests that demand has shifted to other cities, such as Cathedral City, Palm Desert, and Rancho Mirage, where short-term vacation rentals are not permitted. Consequently, "STR-preneurs" might be reevaluating the value of owning short-term rentals in Palm Springs, as the premium previously associated with the city's less regulated environment may no longer hold.

Analyzing the Data:

Examining data from 2019 to 2023, realtor.com evaluated various indicators such as listing prices per square foot, the proportion of listings with price reductions, inventory levels, and time spent on the market.

Palm Springs, with its significant number of short-term rentals, provided an ideal setting to observe potential effects compared to destinations with fewer STR listings. Additionally, its proximity to other Coachella Valley cities allowed for comparative analysis.

The impact of the new STR policies can be inferred from deviations in key market indicators compared to neighboring areas.

Key Findings:

1. Home Prices: While the entire Coachella Valley witnessed a surge in average price per square foot in 2021 and 2022, Palm Springs experienced more dramatic fluctuations, with an almost 80% increase between 2020 and 2022. However, after the enforcement of the new regulations in 2023, listing prices per square foot in Palm Springs decreased by 4.5%, contrasting with the leveling off observed in the rest of the Coachella Valley and California.

2. Listings with Reduced Asking Prices: In 2023, Palm Springs led the Valley in price reductions, with 22% of home sellers lowering their prices—a significant increase compared to previous years.

3. Sale-to-List Price Ratio: This ratio declined in Palm Springs in 2023, indicating decreased demand compared to other Coachella Valley cities and Riverside County. This trend suggests a downturn in Palm Springs' real estate values following the policy change.

Conclusion:

While causality cannot be definitively established, the convergence of various factors, including the aftermath of the COVID-19 market surge, rising interest rates, and the implementation of STR regulations, likely contributed to the recent market changes in Palm Springs.

Kudlac notes the combination of these factors as a "perfect storm," underscoring the complex interplay between market dynamics and regulatory interventions.

Sourced from Realtor.com