Early data indicates success after city addressed vacation rental oversaturation in some neighborhoods

More than a year after city leaders implemented additional regulations to mitigate the oversaturation of vacation rentals in specific neighborhoods, evidence suggests the measures could achieve their intended effects. Despite recent sensational claims of a housing price “free-fall” within the city, data portrays a different, less dramatic scenario.

The Palm Springs City Council enacted strict limits in November 2022 after communities voiced concerns over the escalating number of short-term rentals. Aimed mainly at desirable neighborhoods like Racquet Club Estates, where vacation rentals comprised almost 40% of homes, new stipulations capped short-term rental density at 20% for all neighborhoods.

Data from the city shows applications for vacation rental permits did cool, especially when compared to spikes experienced during the pandemic.

Between December 2022 and January 2024, registrations rose by 279, but this figure includes applications paused due to a fall 2022 moratorium. Once the moratorium ended and the backlog was cleared, the data reveals a more modest increase of just 81 applications in the 10 months up to this past January.

Before the ordinance, year-over-year registrant increases were much more significant. From January 2021 to 2022, for example, registrants increased by 242. Between January 2022 and January 2023, they increased by 437.

Another objective of the ordinance was to improve housing affordability by retaining potential full-time residences. In that regard, data shows there’s still work to be done. 

The latest housing report, issued earlier this month, shows that in Palm Springs, the median price of an average-sized detached home is down 2.7% year-over-year, from $1.2 million to about $1.18 million. Prices in the rest of the valley were down 1.8% year-over-year.

A buyer’s household income would have to be around $330,000 to afford the average home for sale in the city, according to Redfin’s calculator. But recent Census data shows the average city resident’s median household income stands at $67,451.

Using those figures, Redfin estimates that the average home buyer in the city should be looking at housing in the $260,000 range. The only housing units currently for sale in that price range in Palm Springs are 24 one-bedroom, one-bathroom condominium units.

Are sellers struggling as well? Answering that requires some context. 

In the 10 neighborhoods where a cap on short-term rental licenses is currently in effect, owners who purchased their homes in recent years and were looking to cash out said they faced challenges getting their desired price.

Real estate agent David Carden said that’s a familiar lament, due in part to a noticeable trend: homeowners are aiming to offload properties purchased during price peaks, anticipating profits from the short-term rental market – a strategy that is increasingly proving unfeasible. 

“They expect to rent [the houses] for exorbitant prices,” Carden said of would-be vacation permit holders. “They’re not willing to be realistic about pricing and what the property is worth.” 

“Sellers who bought at the height of the market, when housing prices were going up 10%, 20% a year, are still trying to make a tidy profit. And the market does not support that, it’s not sustainable.”

— David Carden, real estate agent

From 2022 to 2023, after the ordinance changes passed, prices for single-family homes in neighborhoods where a vacation rental permit cap went into place dropped by about 14%. But that drop occurred after historic price increases in the previous years. 

From 2019 to 2020, prices in those neighborhoods increased by about 9%. From 2020 to 2021, prices increased 35%. And from 2021 to 2022, prices increased 33%.

“Sellers who bought at the height of the market, when housing prices were going up 10%, 20% a year, are still trying to make a tidy profit,” Carden said. “And the market does not support that, it’s not sustainable.”

“They’re not really buying to be a part of a neighborhood,” he added. “They’re buying to be a part of a mini hotel district.”

The vast swing in home prices is not unique to Palm Springs. As city officials were debating the vacation rental ordinance updates in the fall of 2022, experts nationwide were warning of an impending price correction after the pandemic-era boom – partly due to rising interest rates. In September 2022, Redfin reported that 19% of sellers dropped their asking price.

The most significant price corrections were expected in pandemic-era “Zoom towns,” according to US News and World Report, including places like Boise, Idaho, Greeley, Colo., or, as Carden points out, Palm Springs.

The Riverside-San Bernardino-Ontario real-estate market, of which Palm Springs is included, was rated the country’s fourth most overvalued housing market.

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