“Pinball” now accounts for a whopping 10% of home sales

0

One in 10 US homes sold in the first quarter of 2022 was “flipped” — or bought and sold by an independent buyer within a year — the highest level since 2000.

Why it matters: While the uptick in home prices has made home selling a blood sport, profit margins are shrinking, reflecting rising mortgage rates and higher labor and material costs.

Driving the news: Home flipping has been on the rise for five consecutive quarters, according to ATTOM, which operates a national real estate database.

  • In the first three months of the year, 114,706 single-family homes and condos were sold in the US, accounting for 9.6% of home resales transactions.
  • That was up from 6.9% in the fourth quarter of 2021 and 4.9% in the first quarter of last year.
  • But gross profits from those deals were lower than a year ago, and profit margins fell to their lowest since 2009, ATTOM said.

What you say: “The good news for fix-and-flip investors is that demand from potential homebuyers remains strong,” said Rick Sharga, executive vice president of market intelligence at ATTOM.

  • “The bad news is that rising mortgage rates are starting to slow home price increases and buyers have become more selective,” he added.
  • Buyers are “less willing to outbid other buyers for properties they are interested in,” Sharga said, adding, “This has predictable implications for profit margins for investors.”

The big picture: Institutional flippers are often seen as the big bad guys in the country’s acute housing crisis, where affordable housing and “starter” homes are particularly scarce.

  • “From individuals with smartphones and a few thousand dollars to pension and private equity firms with billions, investors looking for yield are buying single-family homes to rent or sell,” the Wall Street Journal reported last year.
  • They “compete with ordinary Americans for houses” and drive up prices, according to the Journal.
  • “You now have permanent capital that competes with a young couple trying to buy a house,” John Burns, a real estate consultant, told the Journal, adding, “This will make US housing more expensive over the long term.”

other factors — like lackluster home construction and rising lumber costs — have also played a big part.

  • A 2021 analysis by Freddie Mac put the national housing unit shortage at 3.8 million, while a National Association of Realtors report from the same year found a “subsoil gap” of 5.5 to 6.8 million units since 2001.

Where they reflect: Phoenix got the flipping price for the first quarter of 2022: 18.7% of all home sales there were flips.

  • Next came Charlotte, NC (18%); Tucson, Ariz. (16.2%); Atlanta, Georgia (16.1%); and Jacksonville, Fla. (16%).

Where they are not: Olympia, Washington had the lowest home flipping rate of the metro areas analyzed by ATTOM: 4.4%.

  • The next runners-up were Portland, Maine (4.6%); Salem, Ore. (4.7%); Syracuse, New York (4.7%); and Davenport, Iowa (4.9%).

Using the numbers: As naïve investors continue to fix and flip, their return on investment dwindles: Typical returns reduced in three-quarters of the metro areas, ATTOM said.

  • Flipped homes resold in the first quarter of 2021 at an average price of $327,000. That’s a gross profit of $67,000 above the average investor purchase price of $260,000, resulting in a 25.8% profit margin.
  • But profit margins declined sequentially in the first quarter of 2022 in 73% of metro areas with enough data for analysis, ATTOM said.

Most investors pay cash for the homes they flip. Almost two thirds of the upside down houses in the first quarter – 62.7% – were bought by the fins without financing.

  • This is virtually unchanged from the previous quarter (62.9%) and slightly up from 60.9% in the first quarter of 2021.
  • As interest rates rise, “cash buyers should have an even bigger competitive advantage in the fix-and-flip market,” Sharga said, better-capitalized investors rising over the next few quarters.”

What’s next: The fix-and-flip market is expected to cool along with the broader housing market as mortgage rates rise, house prices ease and labor and building materials remain in short supply.

Share.

Comments are closed.