"...Because there was no room for them in the katalyma"

I'm sure that most of us are at least familiar with the story of the very first Christmas ever:

And it came to pass, that in those days there went out a decree from Caesar Augustus, that the whole world should be enrolled. This enrolling was first made by Cyrinus, the governor of Syria. And all went to be enrolled, every one into his own city. And Joseph also went up from Galilee, out of the city of Nazareth into Judea, to the city of David, which is called Bethlehem: because he was of the house and family of David, to be enrolled with Mary his espoused wife, who was with child.

And it came to pass, that when they were there, her days were accomplished, that she should be delivered. And she brought forth her firstborn son, and wrapped him up in swaddling clothes, and laid him in a manger; because there was no room for them in the inn.

-Luke 2:1-7 (Douay-Rheims Challoner)

Because of that little statement that Luke makes in verse 7, as the ages pass by, many inspirational stories, poems, and sermons have been made on the innkeeper who either gave Mary and Joseph room or shooed them away. However, did Luke really refer to an inn in Luke 2:7?

First, we need to realize what word it was that Luke used in his story which is rendered as "inn" in our Bibles. Luke had used the word κατάλυμά (katalyma). In extra-biblical literature, katalyma has a wider connotation than "inn;" it can also mean "house," "guest room" or "lodging-place". It is a noun form of the verb καταλυο (kataluo), a compound verb (kata "among" + luo "break up" or "(un-)loose") which translates literally as "to disintegrate" or "to unyoke," i.e. "to loosen down." As a place of rest and lodging, a katalyma was a place to drop your baggage, to untie the straps and packs of the beasts of burden and simply sit down and relax.

When Luke speaks of a commercial inn, as he does in Luke 10:34 (in the parable of the Good Samaritan), he uses a different word, πανδοχεῖον (pandocheion), which literally means "accepting all comers", a type of public lodging-place or hostelry which was more common in Palestine, Syria, and southern Anatolia in Jesus' time than in the western Roman world (in a former time, pandocheia were more geographically distributed; many of these had diminished in Jesus' time).

The only other place where Luke uses katalyma is in 22:11, where it refers to the upper room where Jesus and company held the Last Supper, which is clearly not an "inn" but a large guest room attached to a private house. Mark (14:14) also uses katalyma to describe the upper room itself.

During the time of Jesus, the only inns that existed were essentially truck stops for caravans. It was a place for travelers and pack animals to eat, a shelter in which to sleep overnight, a market for supplies for the road and is considered to be a hangout for prostitutes (female innkeepers were referred to as pundaqit in Aramaic, which was synonymous with the Hebrew zonah "harlot"; cf. Joshua 2:1) and others of an unsavory reputation; the word pandocheion itself had some negative connotations due to this.

Another thing that we need to consider is that at the time of Jesus, Bethlehem was a small town that was not near a major highway, so there is no reason to think that there would have been a commercial inn there, since inns were mostly built where there is more traffic, i.e. major roads, especially Roman ones; indeed, there is no archeological evidence for the existence of any inns in Bethlehem. With the population of the town in the 1st century being estimated as being around a thousand (only about a few times bigger than Nazareth, which is estimated to have had 200-400 residents at this time) and the lack of any highway nearby, the existence of a commercial inn in Bethlehem seems rather unlikely.

It then becomes more likely that Luke meant katalyma to be understood as "guest room" or "house" rather than "commercial inn." Middle Eastern hospitality required people to give shelter and sustenance to travelers (relatives or no), to make themselves as comfortable as possible at the host's expense. Since Joseph and Mary came to Bethlehem in the region of Judea since that was his ancestral home, we could assume that Joseph, at least, may have had a number of distant relations living in the town who could serve as potential hosts. Kinship ties throughout the village would have been the rule, not the exception.

Archeological and literary evidence shows that houses in Bethlehem and its vicinity often had stables within the house where the family would keep their animals while the guest room was in the front of the house. The animals as well as the family stayed under one large enclosed space that was divided so that the animals would usually be on a lower level, while the family would sleep on a raised upper level.
Joseph and Mary would have come too late to get the guest room (Luke uses the definite article in the original Greek), which would have been totally crowded with other travelers who had come because of the census, so the hosts (Joseph's distant relatives?) did the best they could to help both husband and wife by putting the newborn Jesus at the stables inside the house, since no space for the baby could be had in the now-crowded guest room.

For the Middle Eastern peasant, it is a bad thing to be alone. He does his thinking in a crowd, as his culture is a group-centered one (as opposed to the individualistic thinking of the 21st century West). Thus, in the case of a birth, the men will sit apart with the neighbors, but the room will be full of women assisting the midwife; the assumption therefore that Mary and Joseph were alone, as they are so often depicted in Nativity scenes, is probably historically inaccurate. We are told that Mary swaddled the newborn infant by herself, and indeed some take this as evidence that the Holy family were alone; however, there are accounts on how Palestinian women are not incapacitated by childbirth and could even give birth in a field and go back to the village, baby in tow, with no unusual effort required.

In this scenario, it would then perhaps be natural that Mary would have swaddled the babe, since she could physically do so with little to no assistance; so when Luke tells us that Mary "wrapped the babe in swaddling clothes" that does not necessarily mean that they were alone.

In an alternative scenario, the katalyma could also refer to an area where large crowds are gathered, as might have been the case with the census. In this arrangement, people and animals were crowded next to each other in a large, open area where temporary shelters could be erected. The area would then be a totally busy place bustling with activity, noise and cooking fires. If Bethlehem had such a very crowded "camping area" of sorts for the census, then a less busy and a less crowded accommodation like a stable would certainly have been preferable for the birth of Jesus.

St. Justin Martyr, in the 2nd century (Dialogue with Trypho 79), cites a tradition where Mary and Joseph took shelter in a cave near the village - which to an extent is still mainly present in the Eastern Church, which continues to depict the "stable" in iconography as a cave. This is also plausible from a historical point of view, as caves were oftentimes used as stables and various peasants were in fact known to use caves as houses in the time of Jesus.
Interestingly, ancient translations of the Bible never directly translate katalyma into inn. For example, the Syriac Peshitta says that Mary put the baby in the manger "because there was no room where they could lodge" while the Latin Vulgate and Codex Bezae (which preserves a Vetus Latina translation of the Bible) translates the word as diversorio, which like katalyma has a broader meaning than "inn" and could also be translated as "lodging house," "stopping place," or even "accomodations" in general. In Latin, more specific terms for an inn is taberna or stabulum; the latter term, also meaning "dwelling," "tavern" (or even "brothel"!) is the one which Jerome uses for pandocheion in Luke 10;34. Interestingly, Arabic translations of the Bible themselves have never rendered katalyma as inn.

John Wycliff's version of the Bible into English even renders diversorio as "chaumbir"; it was only from Tyndale's 1520 translation that the tradition of rendering katalyma/diversorio as "inn" in English Bibles started.

Another popular misconception is that Mary went into labor immediately or shortly after arriving to Bethlehem. Luke merely states that Jesus was born "when they were there" (not upon arrival); exactly when is not specified, yet this implies that the couple was already in Bethlehem for some period of time prior to Mary going into labor. Thus the popular image of Joseph and Mary arriving at Bethlehem at the very same day/night that she gave birth to Jesus probably has no historical basis. When fitted with the above, the picture becomes thus:

Joseph and the now-pregnant Mary arrive into Bethlehem. They either stay in the house of a certain resident of the village (relying on traditional Middle Eastern hospitality) or camp out in a large open area which functioned as a large "camping area" as the influx of "visitors" to Bethlehem continue. Eventually, as the number of guests staying in the house or the campsite increase, Joseph and Mary find it increasingly difficult to have some space for their child, necessitating that the newborn baby be placed inside the stables instead.

This may not fit our traditional understanding and depictions of the Christmas story and may prove to be 'uncomfortable' for a number of people, but hey, Jesus Himself who "set up His dwelling among us" did not meet His contemporaries' expectations and was even a stumbling-block!