AUSTIN, TEXAS - MARCH 19: A 'For Sale' sign is seen on March 19, 2024 in Austin, Texas. From peaking in 2022, From peaking in 2022, home prices and apartment rents in Austin, Texas, have declined more than any other city in the country in 2024. While Austin remains ranked as the 10th-largest city in the U.S., the city is now leading a national property cool-down. From 2020 through 2022, Austin led at the forefront of rapid economic growth, with major companies such as Tesla and Oracle arriving. Austins recent downswing indicates that various migration patterns, once fueled by the COVID-19 pandemic, continue to fade as the country slowly returns to pre-pandemic levels. Brandon Bell/Getty Images/AFP (Photo by Brandon Bell / GETTY IMAGES NORTH AMERICA / Getty Images via AFP)
NEW YORK: While the increase in interest rates engineered by the US Federal Reserve (Fed) over the last two years put a damper on the overall US housing market, it took a sledge hammer to home flippers from small contractors to reality TV stars.
Just ask Tarek El Moussa, star of HGTV’s The Flipping El Moussas and former co-host of the real estate and renovation focused channel’s mainstay, Flip or Flop.
“How do I account for [interest rates]? I got my ass kicked last year. I lost a lot of money. And that’s just the reality of the business,” said El Moussa.
Indeed, house flipping – or investing in, and often renovating, a single-family home with the intent to sell for a profit – has fallen from heights seen during the Covid-19 pandemic.
The number of Americans acting as investors in the housing market dived 38.85% between 2021 and 2023’s fourth quarter, according to property data provider Attom Data Solutions.
Through the fourth quarter of 2023, the share of homes purchased by investors fell 11% on a year-over-year basis, a report from real estate and mortgage firm Redfin said.
Even so, housing investors spent US$32.3bil on homes in the United States in 2023, compared with US$33.6bil a year earlier, and flippers bought 26% of the lowest-priced homes during 2023’s fourth quarter, Redfin said.
HGTV’s El Moussa bought 91 homes in 2021 – garnering him a US$600,000 average monthly mortgage payment. Then mortgage rates surged, home sales in southern California plunged, and he found himself with inventory he could not offload.
Home flipping does best in a frenetic “buyer’s market”, with prices rising amid increased transactions, said Chen Zhao, Redfin’s senior economist.
After the Fed began hiking rates in March 2022 to lower inflation, buyers and sellers held off, creating gridlock in the housing market.
Rates eventually reached a two-decade high near 8% in October, and the resulting market has presented investors with the same issue home-buyers face – limited inventory and lukewarm demand.
Rates have eased somewhat: Freddie Mac said last Thursday the average 30-year fixed-rate mortgage was 6.87%.
Still, the current scene is a striking departure from the onset of the pandemic when sub-4% mortgage rates and heightened demand could promise a juicy profit.
For Elisa Covington, an investor based in the San Francisco Bay Area, a return on investment during 2021 often swung between 60% and 70%, she said, occasionally hitting 100%.
“In 2021 and early 2022, my projects were getting much higher returns,” Covington said. “But this year the profit margin for most of my projects have been in line with my expectations” of 30% to 40%.
Lack of homebuyer demand would make it easier on investors looking for single-family homes, but reduced inventory has largely outweighed that, cutting into acquisition trends.
Julio Martinez, co-owner and broker at JATS Properties in Los Angeles, said “2023 was kind of weird”.
He acquired just six homes last year and even that was due to several of the properties being in foreclosure. If not for that, “we probably would’ve only done one or two”.
Some construction companies say cooling home investment has cut into new business activity.
Ghulam Mustafa, owner of New-York based Sahara Builders, said the decline in his firm’s full-gut renovation projects since the pandemic has caused a 40% decline in profit since 2021 through the end of 2023.
Last year “was much slower than the pandemic”, Mustafa said.
For contractors who don’t build new homes, steady project supply in the absence of gut-renovations is replaced by smaller-ticket refurbishing projects for existing home-owners, RedFin’s Zhao said.
For house flippers, meanwhile, lower profits have reduced the labour they can hire for renovations, which can decelerate sales.
JATS Properties’ Martinez had to let go of a full-time handyman, he said. In addition to property flipping, his family-owned company operates as brokers and property managers, so that labour loss meant less attention to home-flip projects.
“We had to slow down on our projects, and lend them out to our clients,” said Martinez.
“Typically we take first priority because they’re our employees. But when we don’t have the funds to cover our own projects, we have them work on our clients’ homes. It’s taking the burden of expense of those employees off our backs.”
Amid the slow turnover, flippers are diversifying their activities.
Martinez, who saw transaction volume in 2023 fall by half from 2021, began making property-secured loans to aspiring investors.
And El Moussa, who needed to gird for losses he knew were coming from unsold flipper projects, shifted to buying home purchase contracts wholesale and selling to investors, deals that typically net smaller margins but are less risky than traditional flipping.
“In order to get prepared for those losses that were coming, I stopped buying houses to flip and I only focused on wholesaling,” he said. — Reuters
