Less than a decade removed from the Great Recession where countless Americans walked away from their homes as default rates and foreclosures hit record highs, something else is beginning to bubble beneath the surface. Despite Washington officials promising it wouldn't happen again, posing strict controls on bank lending and requiring deeper background checks and higher deposits, one sector of the trillion dollar U.S. housing market is showing signs that 2005-2008 may not be a one-off. Welcome to the enigmatic world of house flipping.
Research by ATTOM Data Solutions defines a house flip as a property that is "sold in an arms-length sale for the second time within a 12-month period." In other words, these properties are bought and sold by someone whose sole purpose is making a capital gain. However, the data collected by ATTOM shows that those flipping houses are making less return per house, while taking on more financing to do so. "In markets where distressed discounts have largely dried up, flippers are showing more willingness to leverage financing when acquiring properties, often purchasing closer to full market value and then relying more heavily on price appreciation to fuel their flipping profits," Daren Blomquist, senior VP at ATTOM Data Solutions said.
Leveraging up on housing. Sound familiar? In the second quarter of 2017, the total value of homes flipped reached $4.4 billion for the first time since the third quarter of 2007, and 35 percent of homes flipped were done so with financing – the highest level since the third quarter of 2008. And while the number of houses being flipped increased in the second quarter, the return on investment fell, both from the previous quarter and the second quarter of last year. (See also: Top 5 Must-Haves For Flipping Houses.)
Source: ATTOM Data Solutions
House Flipping Risks
While return on investment remains worthwhile for house flippers, some risks can lower profitability fast, as it did from 2005 to 2008. With the number of homes being flipped and financing on the rise, it puts extra pressure on the seller to limit the time the house is on the market. For every extra day a financed home sits unsold, the holding cost eats into profitability.
Secondly, with financed homes on the rise and the Federal Reserve slowly beginning to tighten policy, the cost of this financing is set to increase. So house flippers are taking on more risk for less return.
Finally, house flipping has the potential to distort home sales figures. According to ATTOM Data Solutions, there are 16 Zip codes in the U.S. where at least 25 percent of home sales are flipped. Zip code 70814 in Baton Rouge and California's 90062 were the two highest with one-third of home sales considered to be flipped.
Source: ATTOM Data Solutions
While recent U.S. existing home sales data that showed sales have started creeping back up after falling to a seasonally adjusted 5.35 million year-over-year in August, the lowest point in 2017. It's unclear at this point if this is a turning point for the house flipping market or just a fluke.
House flipping is a risky business, but a profitable one when times are good. However, with more flipped homes being financed, it poses a significant risk if the time taken to flip these homes increases. (See also: Why Housing Costs Shouldn't Exceed 30% of Your Budget.)
The trends look eerily similar to 2005-2008. The question is, this time will it be different?