Monday, June 15, 2015

Flipping Homes

According to recent data from RealtyTrac, 17,309 homes or four percent of all single family homes sold in the first quarter of 2015 were flipped, that is, they were sold as part of an arms-length sale for the second time within a twelve month period.  While this seems like a reasonably large number, it has actually declined from 6.7 percent of all homes sold in Q2 2014 as shown on this graph:

Even though the level was down from earlier in 2014, it is important to note that the level of flipped homes is still much higher than it was in the first quarter of 2011 when only 1.3 percent of total single family homes sold were flipped.

The average gross profit of these sales in Q1 2015 was $72,450, up from $65,290 in the previous quarter and up from $61,684 one year earlier in the first quarter of 2014.  In fact, this is the highest gross profit level seen since record-keeping of this type began in Q1 2011.  The average return on investment or ROI was 35.1 percent during Q1 2015, down very slightly from 35.3 percent in the previous quarter and about the same as the return on investment in the first quarter of 2014.

Here is a graphic showing the flipping returns trend:

The ten metropolitan areas with the biggest home flipping returns are:

Baltimore, MD - 94.1 percent
Deltona - Daytona Beach - Ormond Beach, FL - 74.7 percent
Ocala, FL - 73.9 percent
Lakeland, FL - 62.5 percent
Detroit - Warren - Livonia, MI - 58.3 percent
Tampa - St. Petersburg - Clearwater, FL - 57.2 percent
Tucson, AZ - 56.0 percent
Pittsburg, PA - 55.2 percent
Memphis, TN - 54.8 percent
Dayton, OH - 53.7 percent   

In each of these metropolitan areas, at least 50 single family home flips took place during the first quarter of 2015.

Here is a list of the ten metropolitan areas with the highest share of homes being flipped:

Memphis, TN - 10.6 percent
Ocala, FL - 8.0 percent
Miami - Fort Lauderdale - Pompano Beach, FL - 7.9 percent
Tampa - St. Petersburg - Clearwater, FL - 7.4 percent
Sarasota - Bradenton - Venice, FL - 7.2 percent
Port St. Lucie, FL - 7.2 percent
Lakeland, FL - 7.1 percent
Stockton, CA - 6.8 percent
Reno - Sparks, NV - 6.7 percent
Los Angeles - Long Beach - Santa Ana, CA - 6.6 percent

It is interesting to note that the metropolitan areas with the highest share of flipped home sales were among the hardest hit when the housing bubble burst in late 2007.  Of the top 20 markets for flipping, 10 are located in Florida, four are located in California and two are located in Nevada.

Who is buying these flipped properties?  Of the completed flips in Q1 2015, 34.7 percent were flipped to non-owner/non-occupant buyers, in other words, real estate investors and second home buyers.  This is the highest share of non-owner/non-occupant buyers since the first quarter of 2011.  Here are the markets with the highest share of non-owner/non-occupant buyers during Q1 2015:

Virginia Beach, VA - 88.8 percent
Colorado Springs, CO - 88.4 percent
Washington - Arlington - Alexandria, DC - VA - 86.2 percent
Richmond, VA - 84.4 percent
Boston, MA - 83.4 percent 

More than half of all homes flipped in the first quarter of 2015 ranged in price between $100,000 and $300,000 as shown on this graphic:

The best returns on investment were for homes ranging in price between $100,000 and $200,000 where the gross ROI was 47 percent followed by homes ranging in price between $1 million and $2 million where the average gross ROI was 44 percent.  The worst returns were on houses that had a flipped price of less than $50,000; these homes generated a gross ROI of negative 2 percent.

Right now, home flippers are benefitting from four factors; ultra-low mortgage interest rates, rising house prices, low rates of new home construction and a general shortage of housing.  According to Bloomberg, many of these purchases are funded through the use of bridge loans, funded by a growing number of Wall Street companies including Colony Capital Inc., Blackstone Group and Cerberus Capital Management.  As well, private equity and non-bank companies like Oaktree Capital, Arixa Capital Advisors and LLC are offering short-term financing to buy and renovate properties since there are few banks that are willing to grant credit for these speculative real estate deals.

In many ways, what we are seeing today is similar to what was seen in the housing market in 2006 but on a smaller scale.  Back then, according to the Federal Reserve Bank of New York, more than 33 percent of all U.S. home loans went to people who already owned at least one home as shown on this graph:

You will notice that in some states, the situation was even worse with up to 45 percent of new mortgages being issued to multiple home owners in Arizona, California, Florida and Nevada, three states that are currently experiencing very high levels of home flipping.

What is concerning about the current situation is that flipping is concentrated in a few metropolitan areas, mainly in the sun and sand belt states that were hit hardest by the housing bubble collapse.   This is likely creating a situation where some markets are experiencing unsustainable price increases, particularly in an environment where mortgage interest rates will eventually rise and housing flippers could find themselves holding real estate that they can't get rid of. 

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