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.
