Home-Flippers Take Breather Even as Mortgage Rates Decline
But there's one group showing less and less interest in buying residential properties: so-called "home flippers" — investors and speculators who rush into real estate deals, buy up properties and fix them up to sell at a (hopefully) quick profit. Loosely defined, home flippers buy and sell a home within a year.
The numbers show a definite slowdown in home flipping. According to RealtyTrac and its Home Flipping Report, only 31,000 U.S. single-family homes were flipped in the second quarter of 2014. That's 4.6% of all U.S. home sales, down from 6.2% in the second quarter of 2013.
Part of the problem is that flippers' return on investment is slipping. According to RealtyTrac, gross profit margins for home flips stands at $46,000, or a 21% return on investment. But that is down roughly a third from the second quarter of last year, when home flippers earned 31%.
Yet just like homeowners who have had to learn a new normal in which home values grow at a slower pace than before the Great Recession, home flippers may have to settle for weaker profits on property deals.
"Home flipping is settling back into a more historically normal pattern after a flurry of flipping during the recent run-up in home prices in 2012 and 2013," says Daren Blomquist, vice president at RealtyTrac. "Flippers no longer have the luxury of 20% to 30% annual price gains to pad their profits. As the market softens, successful flippers will need to focus on finding properties that they can buy at a discount and efficiently add value to."
Despite the slowdown, there are some U.S. metro areas that still fare well with investment-only home sales. RealtyTrac reports that Pittsburgh (with a 106% rate of return on home sales deals in Q2, 2014), New Orleans, Baltimore, Virginia Beach and Daytona Beach all have home flipping profit margins of over 50%.
But home flippers are largely taking a breather as the residential property summer sales season draws to a close. Whether they return is anyone's guess, but industry professionals would likely view any extended break as a negative to the nation's real estate market.
After all, if the investors don't see a big profit from the housing market, maybe some Main Street buyers feel the same way — even as mortgage rates continue to fall.