Because there are negative externalities to someone constantly renting out their unit for short term stay. In a completely free market, there are no rules to protect the neighbours from these negative externalities.
Investment properties have incentives in place to not spend money on maintenance, not spend on upkeep to the extent the owner can get away with it.
With a vacation rental the incentive is to make it as nice as possible to charge a premium, and the rents support a higher level of finish and polish to a property.
I live right between two short term rentals and people come and go all the time, and I love it. I've met so many cool people, especially from Europe travelling in the US.
The house is kept up much nicer than the other multi families around it.
None of the guests have ever once had a party, made noise, left trash or anything negative.
As you move up the levels, the market becomes less free (easier to move to a different apartment block if you don't like the rules than to move to a different state) but becomes far better at protecting against the negative externalities (housing cooperative doesn't have the same enforcement capabilities as local or state governments).