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Home flippers see lowest returns in 8 years as costs rise

An ‘Open House’ sign is displayed as potential home buyers arrive at a property for sale in Columbus, Ohio.

Ty Wright | Bloomberg | Getty Images

It’s getting harder to be a home flipper. As easy as it might seem on reality television shows, the math is now trickier, thanks to a housing market loaded with roadblocks. Home prices are high, supply of homes for sale is low, and the cost of renovation materials is rising.

Investors flipped 59,876 single-family homes and condominiums in the second quarter of this year, down just over 5% compared with the same period a year ago, according to ATTOM Data Solutions. It defines a flip as a home bought and sold within a 12-month period.

The average gross profit on a flip was $62,700, which translated into a 39.9% return on investment, after renovation and carrying costs. That is down from a 40.9% gross flipping return in the first quarter of this year and a 44.4% return in the second quarter of 2018. Returns have been falling for six straight quarters and are now that the lowest level since the end of 2011.

“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.”

The supply of homes for sale, especially lower-priced homes, has remained extremely low for several years. Overall supply is down over 2% annually, according to the latest reading from the National Association of Realtors. That is causing annual price increases to swell again, after cooling a bit earlier this year.

“The house flippers are looking for that deep discounted price, foreclosure properties, but now distressed property sales are miniscule in the marketplace, so it’s much tougher for people who are just purchasing and looking to flip in the next few months,” said Lawrence Yun, chief economist for the Realtors.

Flipping loans on the rise

On the bright side, mortgage rates are quite low. They began falling in May and moved sharply lower in August. Not surprisingly, more money is going into flipping loans, especially with higher home prices. Home flip lending volume was up 31% annually to a 13-year high in the second quarter of this year, according to ATTOM. The total dollar volume of financed home flip purchases was $8.4 billion.

About 41% of investors used a mortgage to buy their properties, up slightly for the quarter but down from nearly 46% a year ago. During the last housing boom, which precipitated the financial crisis, faulty mortgages fueled a flipping frenzy. Today, lending is more restrained, especially for investors.

“I think the lenders are clearly aware, they want to get return on their mortgage lending as well,” said Yun. “So given the price increases with less chance of price declines given the housing shortage, I think it’s a little safer environment.”

As with everything else in real estate, flipping returns vary by location. Investors are as much as doubling their money in Pittsburgh, PA, Augusta, GA, Cleveland, OH, Philadelphia, PA, Baltimore, MD and Buffalo, NY. On the flip side, investors are struggling in markets like Raleigh, NC, Las Vegas, NV, Phoenix, AZ, San Antonio, TX and San Francisco, CA.

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