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Why a Weakening Housing Market Could Be Good News for Fix and Flip Investors

Insights» Business Development, Upcoming Trends & Changes

September 1, 2018by Robert Greenberg, Chief Marketing Officer, Patch of Land

A recent BiggerPockets’ blog post carried the headline “Why I’ll Never Fix and Flip Houses Again.”

The writer lamented about the HGTV factor: How “reality” TV has made flipping houses glamorous and has misled viewers about potential profits. These TV shows aren’t revealing the true costs of flipping a house, the author says, citing national flipping data and personal experience.

It’s true. House flipping is risky, and the chance of earning a disappointingly weak profit or even losing money is very real although significant ROI is definitely obtainable for experienced flippers.

There are a host of factors out of a residential real estate flipper’s control: interest rates, the economy, house prices, inventory, foreclosures, and even natural disasters. Flippers must have a good handle on costs and know their local real estate market to gauge demand and avoid costly mistakes.

We believe when the housing market begins to shows signs of a slowdown, the popularity of flipping among the “HGTV flippers” will quickly wane.

Here’s why that’s good news for experienced real estate investors: As the amateur flippers exit in droves, competition for available inventory will decline, and many seasoned, experienced investors that have been sitting on the sidelines will re-emerge to take advantage of buying opportunities.

These seasoned real estate investors — sidelined by the lack of inventory at reasonable prices —know how to use leverage to obtain financing that will allow them to maximize profits in a weakening market, and, if necessary, how to profitably manage their new acquisitions as rentals until the market rebounds.

The latest housing numbers

Let’s take a look at some of the recent housing statistics and what effect they may have on real estate investors, homebuyers and sellers.

The one-two punch of rising mortgage rates and rising home prices appears to be putting a damper on the market.

As of early August, the 30-year fixed-rate mortgage was 4.75%, up about 1 point from a year ago.  This, coupled with rising home prices, has caused affordability to become a major factor across the nation.  This is not just for would-be owner-occupants, but also for real estate investors seeking a strong ROI.

Home prices, while still rising, have begun to moderate, according to the most recent S&P CoreLogic Case-Shiller National Index. The 10-City Composite posed an annual increase of 6.1% in May, down from April’s increase of 6.4%, and the 20-City Composite increased by 6.5%, down from the increase of 6.7% the previous month.

Black Knight reports that 32 states saw home price growth slow from March to May, and the Federal Housing Finance Agency said existing-home prices were up 6.4% in May —the smallest monthly year-over-year gain since early 2017.

Sales of existing single-family homes peaked in November 2017 and have declined for three months in a row. Pending home sales are also drifting lower as are sales of new homes. Housing starts hit a nine-month low in June (down 12.3%), and permits declined (2.2%) for the third straight month as builders responded to high materials and labor costs.

Inventories appear to be climbing in some super-hot markets on the West Coast where prices were rising to unsustainable levels, and that could bring some much-needed balance to certain housing markets. Seattle had only a 0.6-month supply of homes in December, but that had risen to 1.3 months of supply by June, according to Redfin.

As another sign of a weakening market, the Fannie Mae Home Purchase Sentiment fell in July for the second consecutive month, dropping 4.2 points to 86.5, after reaching survey highs in April and May.

“Home purchase sentiment seems to have reached a plateau, with potential home sellers likely struggling to find a home to buy amid slow supply growth, expectations for rising mortgage rates, and significant home price increases,” said Doug Duncan, senior vice president and chief economist at Fannie Mae.

Redfin said its Housing Demand Index fell 0.7 percent month over month to 120 in June driven by a 2.2% decrease in the seasonally adjusted number of homebuyers requesting tours, and a 12.2% decrease in the number making offers on homes from May to June. Year over year, the Demand Index posted its largest decline since April 2016.

A Silver Lining

So why is this apparent dampening of the housing market a silver lining for seasoned real estate investors?

Because competition for affordable properties has been intense and inventory levels have been at all-time lows. That could change in a weakening market. The amount of foreclosure inventory, a key source of property for the experienced investor, is on the rise in some markets and prices on market-rate properties are moderating.

ATTOM Data Solutions reports that 45% of metropolitan statistical areas analyzed posted Q2 2018 foreclosure activity above their pre-recession averages, including New York-Newark-Jersey City (50% above); Philadelphia (42% above); Washington, D.C. (51% above); Boston (19% above); and Baltimore (235% above); Nationwide, filings were down 14% over the year-ago period.

Looking at the first half of 2018, 22 states posted a year-over-year increase in foreclosure starts, including Texas (up 11%); Michigan (up 5%); Arizona (up 1%); Indiana (up 51%) and Tennessee (up 13%).

Widely Available Financing

Experienced investors, those who have flipped multiple homes and those who may have portfolios of five, ten, or more homes, are also savvy about financing options to extract leverage for new purchases.

Since the Great Recession, a variety of alternative lenders have emerged with a number of them specifically catering to residential Fix and Flip investors.

These experienced investors are learning that some alternative lenders provide speed, efficiency and competitive financing, and are using leverage instead to grow their portfolios more rapidly.

Experienced real estate investors who have the know-how to operate in a weakening market still have plenty of opportunities, and they may soon have them without distractions from first-time investors.