Low interest rates and fast-growing prices in the housing market are attracting more investors to buy homes and sell them for a profit. Home flips are rising, but profits are falling.
In the third quarter of this year, close to 95,000 homes were flipped, which was an increase for the second quarter in a row after flipping dropped in the first year of the Pandemic. According to ATTOM, 5.7% of all sales were flips.
The average gross profit on a flip was just under $69,000 in the third quarter, down 1.6% from a year ago. The return on investment fell to 32%. It was the largest annual drop since the housing market was in crisis in 2009, when the return was nearly 44%.
A flip is when a home is bought and sold in the same year. Home price increases have started to slow and they are getting smaller returns. When investors bought the homes, the prices went up a lot faster. The drop in profit margins was caused by the fact that the run-up in resale prices was not as much as the run-up in purchase prices.
Todd Teta, chief product officer at ATTOM, said that declining fortunes weren't enough to repel investors, despite a typical scenario of 32% profits before expenses on deals that usually take an average of five months to complete. We will see over the coming months if the amount of money they can make on these quick turnarounds will be enough to keep them in the home flipping business.
Oklahoma City, Pittsburgh and Buffalo had the biggest profits for investors. In Texas, Idaho and Portland, Oregon, the returns were the smallest.
Daniel DiGiacomo has been flipping homes in the Baltimore area for over a decade. He said that this year was particularly difficult. There were many supply chain delays.
The costs of holding the property longer, the costs of materials, the costs of labor, everything that stems from the rehab process has cost something in addition to what we were expecting.
The Baltimore area home is being flipped.
He is now selling to investors instead of owner-occupants. Rental properties don't need the high end finishings and investors will rent them out. That saves DiGiacomo money.
It was easier for us to shift gears and produce a rental grade product with materials we could get locally instead of putting a little bit more luxury type product on the market.
Due to the higher costs and difficulty in finding flappable properties, he flipped half as many properties this year as he did last year.
flippers may pull out again if interest rates rise next year. Less inventory is available to flip, and that doesn't seem to be easing.
The number of active listings in November was the lowest on record, dropping 18% from the same month last year. flipping will be more difficult and less profitable if inventory remains constrained in the pre-spring market.
