Home-Flippers Reliance On Leverage Rises To Highest Level In 9 Years

In the latest sign that the US housing market has peaked after an astounding post-crisis run-up, a report by ATTOM Data Solutions showed that the number of homes flipped by speculators fell to its lowest level in two years.

The report showed that 43,615 single family homes and condos were flipped nationwide during the first quarter of 2017, the lowest number since the first quarter of 2015.

However, even as the number of flipped homes has fallen, their share of total real-estate transactions has actually risen. During the first quarter, they accounted for 6.7% of all transactions, up from 5.8% in the fourth quarter of 2016, and unchanged from the same period a year earlier.

“The business of financing for home flippers continued to grow in the first quarter of 2017 even as the home flipping rate plateaued compared to a year ago and average home flipping returns decreased for the second consecutive quarter,” said Daren Blomquist, senior vice president at ATTOM Data Solutions.

“Home flippers financed an estimated $3.5 billion in purchases for homes flipped during the quarter, up from $3.3 billion in the previous quarter and up from $2.4 billion a year ago to the highest level since the fourth quarter of 2007 — a more than nine-year high.”

The explosion in home valuations in urban markets like Brooklyn, Washington D.C. and San Francisco has inspired real-estate speculators to search for the next big score, with the highest percentage of home flips completed with the aid of outside financing occurring in Colorado Springs, Colorado (69.3 percent); Denver, Colorado (54.8 percent); Seattle, Washington (51.6 percent); Boston, Massachusetts (51.3 percent); and Providence, Rhode Island (47.3 percent).

Matthew Gardner, chief economist at Windermere Real Estate noted that escalating home prices in Seattle forced flippers to rely on financing their purchases.

“Seattle has such a high number of flippers who are financing their purchases relative to the U.S. as a whole due to escalating home prices in our region. The decision to finance is proof that these flippers believe the risks of financing are low due to our booming housing market,” Gardner said in a statement.

Other markets where more than 40 percent of home flips completed in Q1 2017 were originally purchased by the speculator using financing included San Diego, California (46.3 percent); Minneapolis-St. Paul, Minnesota (46.2 percent); Phoenix, Arizona (44.1 percent); San Francisco, California (43.0 percent); and Washington, D.C. (40.5 percent).

“With low interest rates, and available lenders willing to provide non-owner occupied loans, we are seeing many of our investors across Southern California take advantage of leverage financing when participating in housing flips,” said Michael Mahon, president at First Team Real Estate, who covers the Southern California housing market.

The areas where home flipping constituted the highest share of all real-estate transactions was Washington, DC, with a rate of 10.7%, followed by Nevada (9.8 percent); Alabama (9.0 percent); Tennessee (8.9 percent); Maryland (8.5 percent); and Missouri (8.0 percent).

Among 85 metropolitan statistical areas with at least 90 single family and condo home flips completed in Q1 2017, those with the highest home flipping rate were Memphis, Tennessee (15.1 percent); York-Hanover, Pennsylvania (12.5 percent); Fresno, California (11.1 percent); Birmingham, Alabama (10.3 percent); and Las Vegas, Nevada (10.0 percent). Nationwide, the average return for flipped homes fell for the second straight quarter: The average gross flipping profit translated to an average 47.4 percent gross return for homes flipped in Q1 2017, down from an average 49.0 percent gross flipping ROI in Q4 2016 and an average 48.5 percent gross flipping ROI in Q1 2016.

The markets with the highest home-flipping returns were Pittsburgh, PA (141.8 percent); Allentown, Pennsylvania (122.2 percent); Cleveland, Ohio (118.6 percent); Philadelphia, Pennsylvania (111.7 percent); and Baltimore, Maryland (106.0 percent).

The median size of homes flipped in Q1 2017 shrunk to 1,402 square feet – the smallest median square footage going back to Q1 2000, the earliest quarter for which data are available.
That’s down from a median 1,409 square feet in the previous quarter, and 1,428 square feet a year ago.

The median year of construction for homes flipped in Q1 2017 was 1978, the same as in the previous quarter but down from a median of 1981 for homes flipped in Q1 2016.

ATTOM defines home flipping as "an arms-length sale of a property for the second time within a 12-month period."