A month ago when we presented RealtyTrac's analysis of 25 markets where flipping homes is most profitable (yes, they really did that) some thought we were joking: after all can people really be that stupid and forget the crushing aftermath of a housing bubble that popped just seven short years ago driven by the very same underlying factors as the second housing bubble we are experiencing right now. Apparently when the entire economy is flooded in cheap Bernanke (and Kuroda) bux, not only they can, but they will and damn fast too. As for the consequences: this time will surely be different. Either way, we were not joking and as the WSJ followed up on just this topic earlier today, it turns out that house flipping is now back to levels last seen in 2005.
The WSJ reports:
In California, the number of homes sold in recent months that had been flipped—or bought and resold within six months—has reached the highest levels since late 2005, according to PropertyRadar, a real-estate data firm. About 6,000 homes have been flipped in the state this year through April, or more than 5% of all homes sold statewide.
While flipping is re-emerging nationwide, brokers say it is happening most in California, where home prices have risen sharply over the past year. Six of the 10 largest price gains in major U.S. cities over the past year have been in California, according to Zillow. In April, home values rose by 25% from a year earlier in San Jose, San Francisco and Sacramento, and by 18% in Los Angeles.
Is there any magic behind the process of buying in order to sell? Nope:
"When prices rise, this trade works. It's not anything more sophisticated than that," said Christopher Thornberg, an economist with Beacon Economics in Los Angeles.
Just in case there were doubt as to how profound human stupidity can be, some are actually debating whether the current flip that house mania is good or bad.
The industry is split over whether the current flipping activity could lead to potential problems. Jed Kolko, chief economist and a vice president at Trulia Inc., an online real-estate site, says the current activity isn't indicative of a bubble. "A bubble is when prices are rising fast from high levels," he said. "We're not there now."
As explained earlier, those doing the flipping are mostly the same asset managers who have access to unlimited funding.
Today's flippers are stronger financially. Flipping homes requires lots of cash because banks aren't making loans to investors who don't have large down payments. While some investors have bought many homes that can be rented out, it usually isn't feasible financially to rent out more expensive properties.
No, they are not stronger: they just happen to be large financial institutions who buy and sell from each other in lieu of a greater fool appearing. Very much just like the S&P. Problem is the same institutions are now starting to quietly get out of the market, seeing how it ends. Everyone else: best of luck.
It gets worse:
Competition for homes "is reaching bubble proportions, and I'm very wary of it," said Rich Worcester, a real-estate agent in San Diego who flipped about 25 homes last year for himself and clients. Mr. Worcester is representing a colleague who paid $675,000 last month for a foreclosed three-bedroom home in San Gabriel, a Los Angeles suburb. After installing new appliances, relandscaping and staging the empty house with furnishings, it hit the market for $867,000 earlier this month. Mr. Worcester said it hasn't yet received any offers, and he conceded he may cut the price.
Investors generally make all-cash payments, which gives them an extra advantage over buyers who must complete a lengthy mortgage-approval and home-appraisal process.
Robert Ganem beat out four other offers this year when he paid $600,000 for a short sale—in which a home is sold for less than the amount owed on its mortgage—in Ladera Ranch, in southern Orange County. He made cosmetic renovations—fresh paint, new hardwood floors and kitchen tiles—before selling it a few weeks later for $755,000.
Greed may be good, but it is not for those who just want to buy a house for a much more trivial task: to have a place to live.
Meanwhile, the growing competition from investors is unwelcome news for ordinary buyers. After waiting years for prices to hit bottom, "buyers are jumping in before prices bounce so high they can't afford it," said Christine Donovan, a real-estate agent in Costa Mesa, Calif.
Parviz Goshtasby, who moved to Southern California three years ago, is finding few homes available to entry-level buyers in Newport Beach, where starter homes can begin at $800,000. "I slowly realized that I can't compete with these investors," said Dr. Goshtasby, a plastic surgeon.
After three unsuccessful offers, he agreed to pay $1.6 million for a home in January after the seller agreed to finance a 10% second-lien mortgage, but the deal fell through when the seller later got cold feet. Two weeks ago, he offered to pay the $1.2 million asking price on another home that ended up selling to a cash buyer.
In short: deja vu, all over again. And just like last time, this too will end in tears. Only this time there will be no Fed to bail out the financial system. After all the same financial system only exists now because not only the Fed, but every single central bank have gone all in on doing just what the above described: reflating one final bubble.
We would urge everyone to just stay away from this idiocy, same as the centrally-planned, manipulated, broken stock market. However, for those habitual gamblers who just can't here is the handy guide we presented a month ago - where the profitability of flipping houses is highest in the US.