Flipping houses has been a mainstay of the real estate investment market for decades. Speculative house flipping hit its highest point in 2005 – 2007, shortly before the national real estate market crashed along with the overall economy. Today, the house flipping market has hit its highest point since that devastating economic downturn. It’s worthwhile to reflect on the possibility this is a red flag for another economic slump to come.
It’s not time to panic yet but this is a metric worth keeping an eye on moving into 2017. According to a recent study by ATTOM Data Solutions (formally Realty Trac), the pre-bubble high point of house flipping was the second quarter of 2005 when 96,000 homes were being flipped annually.
Not to Worry, Yet
The recent data comes from a study of 950 counties across the country and represents 80 percent of all sales transactions. Of these, 51,500 were classified as flips based on being purchased and sold within a 12-month period. This is significantly below the pre-bubble high point.
However, this is a 14 percent increase in the number of flips compared to the previous quarter and a 3 percent increase from the same period last year. While this is a small boom in flips, it is 46.3 percent lower than the peak in 2005.
Why This Boom is Different
The biggest change in this boom compared to 2005 is that two-thirds of investors are making all cash purchases. That means if the house can’t be sold at a profit, it will remain in the investors inventory rather than becoming a foreclosed mortgage. Although if a private loan is involved, there is always a chance the money partner could foreclose.
On a positive note, a modest number of investors buying up homes, rehabbing them, and then selling them shortly afterward for a profit is a sign of a healthy housing market. The red flag to look for is when and if prices are driven up to the point that the average retail buyer can no longer afford them or qualify for the restricted traditional mortgages available. But the tight mortgage market better assures fewer end buyers will ultimately default. The most successful investors will be those that can offer seller financing (using private loans) at reasonable interest rates.
Appreciation of real estate in recent years makes flipping particularly attractive. The recent ATTOM Data Solutions report shows that flippers are profiting handsomely with an average $62,000 increase in sales price before accounting for repairs. This is the most since 2002.
Some reports are beginning to be published showing a slight decline in home prices. If this trend continues, a general melt down of the national market should be avoided. However, prices in the hottest market are showing no sign of relief. The coming new year holds signs of possible interesting developments in the overall real estate market.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.