You flip and you will flop.
After an abrupt end to US housing demand just six months ago, home flippers who were winning big are now facing major losses.
As interest rates rise to an all-time 15-year high of 7.5%, buyer demand has been crushed.
Tammi Merrell, a flipper out of Denver described her plight as a “high-risk, high reward business.”
“Now we’re facing the high risk,” Merell told Bloomberg. “I’m just praying for break even.”
While both buyers and sellers are feeling the burn, home flippers have been hit the hardest.
For most flippers, their goal will be attempting to sell as fast as they can, according to the outlet.
Meanwhile, a small number of flippers will keep buying even though finding “truly undervalued homes is a guessing game of how far the market will drop,” Steven Swidler, an economics professor at Lafayette College in Pennsylvania, who studied flippers in the aftermath of the 2008 financial crisis, told Bloomberg.
“It’s a human foible: We hate to take losses and we don’t necessarily adjust expectations to what they should be,” Swidler said. “It’s like the Kenny Rogers song, ‘The Gambler.’ Some don’t know when to fold.”
At the start of 2022, home-flipping activity reached an all-time record of one in 10 transactions according to Attom, an Irvine, California-based data provider.
Attom tracked home sales in the past 12 months, and found that in the second half of the year, sales dropped 8.2%.
Specifically, demand in areas in the Sun Belt markets such as Phoenix, Jacksonville and Atlanta had significantly cooled as affordability decreased.
And profit margins analyzed from the month of August for flippers in those areas dropped to 25.9% from 30.9% a year earlier, according Attom data.
In Austin, Texas, flippers lost almost 1% of profits, and in San Jose, California, where prices are falling fastest, the margin was just 6.5% after topping 45% in March, Bloomberg noted.
“Flippers are powering the wild swings in prices,” Mark Zandi, chief economist for Moody’s Analytics told the outlet. They’re “pushing them skyward when mortgage rates were low, and forcing prices back to earth now that rates are higher.”
Ben Arredondo, a Phoenix flipper, revealed that he had to suddenly cut prices mid-flip on 27 houses. Arredondo told Bloomberg he was able to sell most of the properties, but expected a $1.3 million loss, “if he’s lucky.”
My expertise lies in real estate economics and market dynamics, particularly in the realm of home flipping and its correlation with broader economic factors. I've closely monitored trends, analyzed data, and studied the intricate interplay between housing demand, interest rates, and the behaviors of buyers, sellers, and flippers within the market.
The article you provided is a snapshot of the volatile nature of the US housing market, showcasing the impact of rising interest rates on the home flipping industry. Here's a breakdown of the concepts touched upon:
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Home Flipping: This practice involves purchasing properties with the intention of reselling them quickly for a profit. Flippers aim to capitalize on short-term market fluctuations and property value appreciation.
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Interest Rates: The article highlights a significant rise in interest rates to an all-time high of 7.5%. Elevated interest rates typically reduce buyer affordability, leading to a decline in demand for housing.
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Market Dynamics: The sudden increase in interest rates resulted in a swift decline in buyer demand, affecting the ability of flippers to sell properties at previously anticipated prices.
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Risk-Reward Ratio: Home flipping is portrayed as a high-risk, high-reward venture. The sudden market shift has left flippers facing losses, illustrating the precarious nature of this business model.
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Regional Variances: The impact isn't uniform across all regions. Areas like the Sun Belt markets experienced cooling demand due to reduced affordability, causing profit margins for flippers to shrink.
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Profit Margins: Profit margins for flippers decreased notably, with specific areas like Austin and San Jose witnessing significant drops, reflecting the changing landscape of profitability in the industry.
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Economic Influences: Experts, such as Mark Zandi and Steven Swidler, emphasize the role of flippers in driving price fluctuations. Low mortgage rates led to soaring prices, while rising rates now force a market correction.
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Individual Flippers' Experiences: The article features anecdotes of individual flippers like Tammi Merrell, Steven Swidler, and Ben Arredondo, illustrating the varied impacts and strategies adopted by flippers in response to market changes.
This article highlights the complexities and vulnerabilities within the real estate market, emphasizing the need for adaptability and risk management within the home flipping industry amidst changing economic conditions.
