As Home Flips Soar, Profit Margins Drop to 2009 Levels
The share of resales by real estate investors accelerated significantly at the start of 2022, but activity may be about to slow due to a declining return on investment.
In the jumps that have been the largest on a quarterly and annual basis since 2000, the first-quarter turnaround share of all home resales rose to 9.6% from 6.9% in the fourth quarter of 2021 and from 4.9% in the same quarter a year earlier, according to Attom Data Solutions.
However, falling profit margins could signal a change to come. Sales returns fell to 25.8% in the first quarter, from 27.3% in the previous three months and 38.9% in the last quarter of 2021.
While flippers and other buyers who invest in housing generally don’t want to miss out on continued appreciation, they’ll likely think more carefully about participating with a slowdown in returns.
“If you’re this institutional investor, you look at all the markets you’re in and try to figure out: Is this a market that, in the event of a significant downturn, is going to start to experience stress?” Doug Duncan, Economist in chief at Fannie Mae, said in a recent interview.
Several recent analyzes of the housing market suggest that prices could peak in some areas and that investors could become more selective in the future.
Buyers paid premiums of 50% or more over historical trends in 15 of the top 100 markets, according to a recent study of two Florida universities. Additionally, homes in 88% of metro areas have price-to-income ratios above their 15-year averages, according to Standard & Poor’s. Moreover, more than half of investors identified the real estate markets in which they have been active as overvalued, according to a recent Auction.com survey.
Questions about the home flip prospects started as early as last year when Zillow closed a flip unit that used an algorithm-based pricing model. But since then, other players active in the sale or financing of flipped houses, such as open door and redwood trustrededicated themselves to the business.
Investors are more likely to pick their seats than exit at scale in this environment, according to Duncan.
“I don’t see wholesale sales like someone selling 500,000 homes in a month,” he said. “I don’t see that happening, but I would see, on a market-by-market basis, institutional investors trying to understand the dynamics of the markets they’re in and making some sort of educated view of what’s next.”
It remains to be seen whether a pullback from investors could help first-time buyers competing with them for properties in a market where incomes have been strained by inflation and rising rates, but training of households always exceeds the available inventory.
Some homes that have flipped end up in the hands of consumers who use government-insured loan programs to meet the affordability constraints they have, but the share that does has declined.
The percentage of homes returned that went to borrowers using Federal Housing Administration-secured financing fell to 7.9% in the first quarter, from 8% in the previous three months and 9% a year ago.
The fact that some fixed and reversible homes are ending up in the hands of FHA borrowers is a reminder that investor participation in the housing market can have certain benefits for consumers.
“Granted, there’s been a lot of frustration among the housing folks about institutional investors getting involved for first-paying buyers, but that, to me, is all derivative of the housing shortage in general,” said Duncan. “I see their function simply in terms of the structural position of the housing market.”