House Flipping is Back to Pre-Crisis Levels. Here's Why it's Less of a Concern
Many people are purchasing homes using the fix & flip method to make money in the real estate market today. This article goes into detail explaining why there is not a need for concern as there was pre-crisis in 2008. Informative & on point.
via The Wall Street Journal
House Flipping Is Back to Pre-Crisis Levels. Here’s Why It’s Less of a Concern.
Flippers today have much larger profit margins than those at the peak of the previous housing cycle
Speculators flipping homes are making bigger and steadier profits in a sign that the risky business is drawing more sophisticated traders.
House flipping is back to nearly the same level it was around the 2006 peak of the housing boom, when it became a symbol of the rampant speculation that soared before the bubble burst.
But a new analysis from CoreLogic Inc. suggests most of the current flips are less risky than those more than a decade ago, making today’s flippers less likely to cause market volatility if prices decline in the next few years.
Some 10.6% of homes sold in the U.S. in the fourth quarter of 2018 were flips, defined as having been owned for less than two years, according to CoreLogic. That is near the level of the first quarter of 2006, when 11.3% of homes sold were flips, and the highest fourth-quarter level in the two decades since CoreLogic started tracking the data.
The study, however, shows that flippers today have much larger profit margins than flippers at the peak of the previous housing cycle. By one measure, the trades are more than twice as profitable as the flips made in 2006. That offers current flippers more of a cushion if home prices begin to flatten or fall.
Flipping has evolved from the days when cocktail waitresses and cabdrivers lined up to purchase lots in new subdivisions in places like Las Vegas and Phoenix. They hoped to profit from runaway price appreciation, but many became trapped when prices declined.
This time, the market is dominated by professionals who are purchasing older homes that likely need work, appealing to buyers’ desire for a move-in ready home rather than one needing months of renovations. At 39 years old, the median age of a home flipped is the oldest it has been since CoreLogic has been tracking. Flipped homes today are about a decade older than they were in 2006.
“Flippers are very different today than they were in the past,” said CoreLogic Deputy Chief Economist Ralph McLaughlin. “Even though we see hype and hysteria in popular culture, this isn’t necessarily something to worry about.”
Still, the trade is hardly a sure bet. Flippers are vulnerable if the housing market turns and prices begin to decline. Unlike long-term homeowners who can ride out the market, flippers often need to sell quickly to pay off construction loans or raise funds to buy their next property.
Rachel Street, a real-estate agent with a home-flipping company, said there are significant financial risks to buying older properties.
“Every house I’m just going to do a cosmetic rehab. Then you open the wall and you find that every joist is rotted. That is never fun,” she said.
But CoreLogic notes that the flipping market has become more institutionalized. Corporate sellers made up more than 40% of flippers in the fourth quarter of 2018, the highest level in CoreLogic’s data and nearly three times the share of the market they had during the last boom.
Companies like Opendoor and units of Zillow Group Inc. and Redfin Corp. buy from sellers looking to avoid the hassle and uncertainty of listing their homes.
Mr. McLaughlin’s analysis looks at so-called economic profits, or those made above increasing home prices in the market overall. That offers better insight into whether investors are actually adding value to properties. CoreLogic doesn’t know how much investors spent fixing up the property before reselling.
Flippers made a median economic profit of nearly 23% on homes flipped in the fourth quarter, according to CoreLogic. At the peak of the last housing cycle, in the first quarter of 2006, flippers made a median economic profit of 9%.
Professional flippers can be stiff competition for first-time buyers, helping to drive up the price of lower-cost starter homes. They can, however, also help to create more inventory because many younger buyers don’t have the skills or cash needed to fix up older, dilapidated homes.
Flipping is becoming more professionalized at the local level, too, including in Memphis, Tenn., which was the second most popular market for flipping in the fourth quarter behind only Birmingham, Ala. The median economic profit for investors in the Memphis area is nearly 42%.
One Tennessee-based company, Memphis Invest, buys about 1,000 properties a year in Tennessee, Texas, Missouri, Arkansas and Oklahoma. It renovates homes, finds a rental tenant, then resells them to individuals who want to own single-family rental properties. The company often resells to people in the Bay Area or other expensive markets who can’t afford to buy a home where they live and want an investment property instead.
“They’d much rather buy three or four [homes] in the Midwest,” said Chris Clothier, a partner at Memphis Invest.
Philadelphia was the eighth most popular market for flipping in the fourth quarter and the most lucrative, because many homes date to the 19th or early 20th century and have suffered years of neglect. The median economic profit made by flippers in Philadelphia in the fourth quarter of last year was nearly 93%.
Ms. Street, a former professional opera singer who is based in Philadelphia and hosts a television show called Philly Revival, said her most profitable flip was a turn-of-the-century twin in northwest Philadelphia. She eventually sold the home for $370,000 more than she paid.
But the business is getting more difficult. “A year or two ago I could have walked out and found deals all over the place,” Ms. Street said. Today, “there are six other people waiting.”