The US housing market is in the middle of modest rebound, but speculators might have played a bigger role in this comeback than many might imagine. According to ATTOM Data Solutions’ report on home flipping during the second quarter, some 59,876 single family homes were flipped during the quarter, up 12.4% from Q1 2019, but down 5.2% from a year ago. Meanwhile, profits for home-flippers shrank but just a sliver when compared with the same period from a year ago, as well as the prior quarter.
The homes flipped during Q2 represented 5.9% of total homes sold in the US during the quarter, down from a post-recession high of 7.2% from Q1. Those homes generated gross profits of $62,700, up 2% from Q1, but down 2% from a year ago.
The typical gross flipping profit of $62,700 in Q2 2019 amounted to a return on investment of 39.9%, compared with the original purchase price. That’s down from a 40.9% gross flipping ROI in Q1 2019, and down from a margin of 44.4% in Q2 2018. As the housing market has peaked, profitability has fallen six quarters in a row, as well as during eight of the last ten quarters.
One housing-market analyst quoted in ATTOM’s report explained how falling profits for home-flippers reflects a softening US housing market.
“Home flipping keeps getting less and less profitable, which is another marker that the post-recession housing boom is softening or may be coming to an end,” said Todd Teta, chief product officer at ATTOM Data Solutions. “Flipping houses is still a good business to be in and profits are healthy in most parts of the country. But push-and-pull forces in the housing market appear to be working less and less in investors’ favor. That’s leading to declining profits and a business that is nowhere near as good as it was a few years ago.”
Despite the pullback in profits, more flippers are trying their hand at the investment strategy. Out of the 149 Metropolitan Statistical Areas analyzed by ATTOM, 104 (about 70%) saw a YoY increase in the rate of home flipping. Some areas reached new peaks during the quarter, including Charlotte, San Antonio, Pittsburgh, Oklahoma City and Raleigh.
It’s not hard to see why: Though some investors inevitably lose tens of thousands of dollars, if not more, in projects gone awry. But many have also recorded massive returns, sometimes doubling their money.
ATTOM chose to break this down in an interesting way: Instead of listing the number of individual cases (which would be time-consuming and nearly impossible to compile), ATTOM instead analyzed the average ROI from the 149 MSAs examined in the report, and determined how many topped 100%. A few examples include: Scranton, Pittsburgh, Reading, Penn., Kingsport Tenn. and Augusta.
Meanwhile, markets with the smallest rates of return included Raleigh, Las Vegas, Phoenix, San Antonio and San Francisco.
The average time to flip a home during Q2 was 184 days to complete the flip, up slightly from the 180-day average recorded in Q1.
Sixteen zip codes had home-flipping rates of at least 25%, meaning that home flips accounted for 25% of home sales.
And finally, of the 59,876 homes flipped during the second quarter, 14.4% were sold to a buyer relying on an FHA program to backstop his or her mortgage, meaning that buyers of flipped homes are very likely often first-time buyers.
One thing ATTOM didn’t examine in its report: What kind of impact so-called iBuyers, companies that will buy and flip a home more or less electronically with minimal work on the part of the sellers. Steve Eisman, of ‘The Big Short’ fame, has said he’s betting against Zillow, largely because of its expansion into the iBuyer business. Here’s why.
Zillow has one of the most flawed business models I’ve seen in a very, very long time.
The part of it I find the most problematic is what they call, I believe, their iHome business, their internet buying business, where they actually go out and buy homes and flip them. I actually think the company doesn’t understand the real risks of this business, which are massive.
There are thousands of mini-markets all over the United States. They’re all local. They’re all extremely different. They all have incredibly different risks.
This is a capital-intensive business. I know only one thing for certain. Between now and five years from now, assuming the company has some level of success, there will be massive problems that they will uncover. I’m sure there’ll be write-downs, I’m sure there’ll be impairments. And I’m convinced that the investor base doesn’t have a clue about what this business is really all about.
So far, Eisman’s Zillow short has proved profitable. Looks like that trend will continue, at least for the near-term.