House Flipping on the Decline
The Great Recession was a boom for house flipping. Real estate prices declined drastically, and thousands of properties were sold as distressed properties. Investors purchased the properties, made moderate improvements and resold the homes for a profit.
Experts say house flipping played an important role in the economy during the real estate crash. It helped increase real estate values and worked to move excess inventory during the real estate crash.
“I don’t think there’s anything inherently wrong with flipping itself,” said Steve Swidler, a finance professor at Auburn University. “In fact, flipping has probably given life to the housing markets that were most hurt back in the financial crisis itself.”
The tide, however, seems to have turned. Multiple factors have changed the market in recently, and it is becoming more difficult to turn a profit. During the third quarter of 2018, 45,901 single-family homes and condos were flipped. That is a 12% decline from the prior year, according to real-estate data firm ATTOM Data Solutions. That is the lowest number of homes flipped in a quarter since the first quarter of 2015. Home flips represented 5% of all home sales recorded in the third quarter, which is the lowest level since 2016.
The decline in house flipping is part of the larger shift in the real estate market. The red-hot market has cooled in many areas of the country, and that is impacting the house flipping market.
“Home flipping acts as a canary in the coal mine for a cooling housing market because the high velocity of transactions provides home flippers with some of the best and most real-time data on how the market is trending,” said Daren Blomquist, senior vice president at ATTOM Data Solutions. “We’ve now seen three consecutive quarters with year-over-year decreases in home flips.”
Increase in Housing Costs
A steady rise in housing costs is a major factor in the decline of the house-flipping market. Since bottoming out in 2010, housing prices have increased by 71%. That means there are fewer bargains on the market than a few years ago. At the same time, fewer houses are being sold as distressed properties, drying up a lucrative pool of properties for house flippers.
In the second quarter of 2018, just 32 percent of home flips nationwide were purchased as a distressed sale – a foreclosure or bank-owned sale – according to ATTOM Data Solutions, a decrease of 6 percent from the prior year. The amount is less than half of what it was in 2010 when purchases of distressed properties for flipping peaked at 68.2 percent of all purchases.
“Fewer distressed sales are limiting the ability of home flippers to find deep discounts even while rising interest rates are shrinking the pool of potential buyers for flipped homes,” Blomquist said. “These two forces are squeezing average home flipping returns, pushing investors to leverage financing or migrate to markets with more distressed discounts available to achieve more favorable returns.”
At the same time, selling a flipped home is becoming more challenging, according to ATTOM. The average time between buying and selling a flipped home has increased to 186 days. That is the longest time period since 2006.
“The business of adding some superficial cosmetic upgrades to a distressed purchase and then selling for a profit is no longer an option,” says Jeff Pintar, founding partner and CEO at Pintar Investment Co., which flips homes in California, Nevada and Georgia.
Rise of Institutional Investors
The market for flipped homes has also become more competitive. In the past, individuals or a small group of investors generally did house flipping. Over the last decade, institutional and large-money investors have become interested in the house flipping market. That has created a more sophisticated and competitive market.
“The flipping industry has become professionalized,” said Ron Sitrin, a real estate agent with Long and Foster in Maryland. “It used to be contractors buying, fixing and selling one house at a time. Not very efficient. It’s now become a very organized business model with companies that have employees looking for deals, securing financing, managing the fix-up. These groups are much more effective and efficient at finding the deals out there and reselling them profitably.”
Historically, financing for a house flip was done through a local bank or people used cash. Now, large financial institutions have been set up to help people access the house-flipping market. That has drawn more people into the marketplace.
“There’s just a huge amount of institutional capital entering the space,” said PeerStreet CEO Brew Johnson. “We have institutional partners, everything from endowments to major hedge funds to banks that are interested in accessing this asset class.”
Rising Interest Rates
Finally, interest rates are impacting the house flipping market. When the Great Recession occurred, mortgage rates were at historic lows. In 2016, interest rates began to increase, and mortgage rates are now just below 5%. That has increased the cost to flip a home and also put pressure on the homebuyers. In 2018, 38.6% homes that were flipped were purchased through financing, hovering near the highest level since 2010.
“Acquisition prices have been creeping up, and it’s now more difficult for investors to buy with cash than previously, but high prices are not the only reason flippers are turning to financing,” said Robert Greenberg, chief marketing officer with Patch of Land.
At the same time, rising interest rates are lowering the purchasing power of buyers. Some buyers who were marginally able to afford a home with the record-low interest rates have now been forced out of the market. That has lowered the demand for housing. In September, home sales dropped to a two-year low.
“There is a clear shift in the market,” said Lawrence Yun, National Association of Realtors chief economist. And he continued: “Homes will take a bit longer to sell compared to the super-heated, fast pace” in recent years.