House flippers and real estate investors were blamed for contributing to the housing crisis a decade ago, partly due to the fast turnover of homes that helped drive prices up. Now, some analysts say investors are providing badly needed affordable homes in certain metro areas.
The number of flipped homes is hitting a six-year high right now, and while it’s certainly padding the pockets of savvy real estate investors, it’s also providing much needed affordable housing – especially in areas where builders are unable to meet demand.
An article in the Chicago Tribune states that a new wave of house flipping comes at a time when builders are focusing on multi-family housing and higher-end homes . Builder costs have increased 30%, making it cost-prohibitive for them to provide affordable housing. Because new home construction is not keeping up with demand, flippers are able to jump in and do the job for them.
Flipped homes are properties that are renovated and sold within a year of buying them. The process of flipping homes involves the hiring of contractors and the use of services in the area, which also helps fire up the job market.
The Chicago Tribune estimated that there are currently 39,775 people who flip homes in the U.S. — that includes individuals, amateur investors, and businesses. It’s reportedly the highest number of flippers since the last big flipping frenzy before the housing market went bust in 2008.
Florida and Texas are two states with the highest number of inexpensive foreclosed homes that investors are fixing up for sale. The buyers are people who want to live in them and other investors who want to rent out for cash flow.
The Tribune also says the renovated homes are breathing new life into older neighborhoods. And they are providing homeownership opportunities for first-time buyers and low-income families.
Auburn University professor Steven Swidler told the Tribune: “This flipping activity could be seen as a social good if it’s bringing houses up to standards and putting them back on the market.” But he also warned that flipping homes can drive prices up too fast — just like it did a decade ago.
The Tribune says that Florida, Nevada, and Tennessee have the highest rates of flipping. A good 7 percent or more of the homes that sold in those states in the last year were flipped homes. The Tribune says in this case, they were selling for well below the rest of the market and that’s providing affordable homes.
The Tribune lists Tampa, Florida as an area that has a combination of foreclosed homes, a high demand for affordable housing, and rising rents. That’s created an attractive market for investors.
Home prices have risen 19 percent in the Tampa area since 2015, The median home price is now $209,000. On the flip side (yes, pun intended) the median purchase price was $150,000 for a flipped house. Investors paid $92,000 on average before fixing them up.
Tampa real estate agent, Peter Lee, told the Tribune that the buyers might be landlords, first-time buyers, or retirees. He said: “You’re giving them a shiny renovated house for $100,000. They’re in heaven.”
The Tribune reports that Nevada, like Florida, was also a hot flip market in the mid-2000’s before it tanked during the housing meltdown but Swidler says conditions today are different.
He says back then, many flippers expected a profit from simply buying a house and selling it. He says now they have to do a lot more work to make them marketable.
They need to patch holes in the walls, fix the wiring, buy a new refrigerator and sometimes much more. That’s why he believes flipping is happening at a slower pace than it did ten years ago which may help prevent a pressure cooker effect on the market.
But home flippers aren’t able to create affordable housing everywhere.
The Tribune reports on a study done in New York City earlier this year that shows affordable housing is now harder to find in Queens and Brooklyn. Hundreds of homes were flipped in those areas last year, but that didn’t seem to keep prices down.
It remains to be seen whether policies implemented by our new President will improve or impede the market for house flippers.
If interest rates continue to rise, real estate could slow down in markets that are already on the verge of affordability. People who flip homes in high-priced markets need to be very careful. Certainly, anyone who owns property in bubble markets need to pay attention, but a slowdown would affect home flippers the most because they are trying to sell.
No one wants to do all the work to buy and renovate a property just to have it sit on the market or worse, watch the value decrease. Additionally, higher interest rates could make it more difficult for buyers to qualify for loans, so it’s best to flip in areas where affordability is in tact.
If the home doesn’t sell, and interest rates on the loan increase, that could be costly for the flipper.
Landlords who are not planning to sell don’t have to worry about it as much. They need only to be concerned about rents increasing or decreasing. Rising interest rates could drive more people into the rental market if they find they no longer can qualify for a loan due to higher payments. This could actually drive rents up further.
With the dust just now settling after the volcanic election, it’s still unclear how Trump’s policies might affect home flippers.
One benefit could be lower taxes. Currently, flippers pay ordinary income tax. Under Trump’s plan, corporate taxes would be reduced from 35% to 15%, so flippers who hold their properties in an LLC, LP or corporation could pay much less in taxes.
Trump has also plans to attack regulations, so we could potentially see fewer regulations for land-use and zoning, which could be a boon to new home construction. But if that happens, people flipping homes may have more competition when it comes time to sell. It also remains to be seen if federal policies will affect local land use regulations and permitting processes.
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