Sign of a Housing Market Bubble, Crash or Long-Term Shift?

In some respects, there’s never been a better time to be a house flipper. 

Investors looking to buy a home, fix it up, and resell it for a profit have more resources at their fingertips than ever before. Private lenders are flush with capital and willing to make loans. Software providers offer highly localized data to help flippers pinpoint potential investment properties and estimate renovation costs. An endless stream of cable television shows, podcasts, and YouTube channels serve up advice from real-estate gurus, packaged in sun-soaked visions of success. 

Most importantly, home prices across the country have skyrocketed over the past two years. In popular markets — such as Las Vegas, Atlanta, and Austin, Texas — the allure of outsize returns has attracted a flood of flippers.

Given the advantageous environment, it’s no wonder home-flipping activity in the US spiked sharply in 2021, the real-estate data firm Attom Data Solutions reported. Its research found that investors flipped about 323,500 single-family homes and condos last year — a 26% increase from 2020 and the highest volume for a single year since 2006. 

But common sense, and the cyclical nature of the housing market, tells us this party can’t last forever. Flippers, like other buyers, face intense competition for available homes, which makes it harder to find deals. Labor and materials shortages have driven up renovation costs. And rising mortgage rates, combined with buyer exhaustion after a prolonged stretch of brutal bidding wars, could put a damper on the demand for homes.

A slowdown in home-price growth, or even a decline in prices, represents the biggest threat to flippers today. So far, surging home prices have shielded overzealous flippers from losing money, as they can sell a property for profit in hot markets even if their renovation costs stretch over budget. If and when that changes, these less disciplined flippers may find themselves staring down losses.

After talking with economists, home flippers, and some of the biggest private lenders in the flipping space, it’s clear that the industry is on more solid footing than it was prior to the financial crisis. But the challenges flippers are facing, combined with fears that the housing market is due for a correction, should be a warning to flippers that serious pain could lie ahead. 

An opaque market full of glamorous promise

Home-flipping has taken a front seat in popular culture over the past decade, thanks to a long line of HGTV shows and a robust ecosystem of support that attracts investors with glamorous promises of quick pathways to financial freedom. The real-estate investing site BiggerPockets, for example, boasts more than 2 million members and offers guides on how to flip a house and make a profit, an online calculator to crunch the numbers on a deal, and forums where prospective flippers can turn to more experienced investors for advice.

But despite its prominence, home-flipping has been relatively under-researched, said Ralph McLaughlin, the chief economist at the housing data company Kukun. 

Data on sales transactions is difficult and expensive to compile, and deals aren’t explicitly labeled as flips in public records. That leaves the handful of companies that aggregate data on flips to rely on proxy measurements, such as tallying homes that sold twice within a year, to get an idea of the size of the market. 

Flipping activity tends to follow home-price appreciation, McLaughlin said, since surging home values attract more investors in search of even bigger profits. The average sale price of homes sold in the US reached $507,800 in the first quarter of 2022, an almost 33% increase from the same period two years ago, the US Census Bureau found. Given the red-hot housing market, it’s no surprise that flipping activity has taken off. 

But it’s impossible to predict exactly where the housing market is headed in the coming years. Rising home prices have aided savvy flippers, but unforeseen costs or inaccurate valuations can easily derail projects and turn profits into losses. And when home-price growth inevitably slows down, it may weed out the speculative investors who bet on the market rather than the value of their renovations.

So as flipping nears historic highs, it’s time to ask: Which of these investors are going to be left holding the bag, and who will come out ahead?

The good news for flippers

Home flippers are typically associated with “bubbly” activity in real-estate markets, which drives fears that the latest surge is evidence of a new housing bubble. But McLaughlin and other experts said the flipping industry, like the broader housing market, is in a much better place than it was prior to the financial crisis.

The US faces a serious housing supply shortage, which stood at almost 4 million homes as of last April, Freddie Mac said. Over the next two years, a record number of millennials are set to reach the prime age for first-time homebuyers, which may fuel even more demand for homes, a recent report from Zillow said. Lenders have also tightened their standards since the financial crisis. So even in the event of a downturn, the underlying fundamentals of the market indicate it won’t be a total bust like the 2008 crash.

In addition to the housing market being healthier as a whole, home flippers have some particular structural advantages on their side: 2019 figures from the US Census Bureau showed that the median age of homes in the US was 39 years, up from 31 years as of 2005. The fix-and-flip lender Kiavi estimated, based on those census numbers, that there were about $25 trillion worth of aging US homes. 

Michael Bourque, Kiavi’s CEO, said that the swell of aging housing inventory gives flippers plenty of runway to continue modernizing homes and profiting off the value they add.  

“Without the supply of aged homes out there, none of this is possible,” Bourque said.

Flippers have faced their fair share of challenges during the pandemic. The costs of materials are rising, and government-mandated foreclosure and eviction moratoriums dried up a key source of inventory early in the pandemic. But Eric Abramovich, a cofounder and the chief credit officer of the fix-and-flip lender Roc360, told me in March that his firm saw some of those headwinds easing. Abramovich said he expected the fix-and-flip market to further accelerate through the rest of the year. 

“Yeah, their costs are going up, and now the Russia situation isn’t helping either, but that’s in the face of surging housing prices as well,” Abramovich said of flippers. “So while the costs have gone up, the value of their collateral has also gone up, which has helped to preserve their profit margins.”

Rising interest rates are also a challenge, but less so for flippers than for traditional buyers.  Unlike people buying homes to live in, who typically get 30-year loans, flippers usually obtain loans for six months to a year, enough time for them to complete renovations and sell. That shorter timeframe means flippers typically feel few effects from rising rates, if they opt to use financing at all.

Attom estimated that 61.3% of homes flipped in 2021 were purchased with cash, up from 59% in 2020. Cash buyers already have a distinct advantage over average buyers who rely on financing, because sellers prefer the ease and certainty of cash deals. And as mortgage rates rise, deep-pocketed investors looking to flip homes could gain even more of an upper hand, said Rick Sharga, Attom’s executive vice president of market intelligence. 

Dark clouds on the horizon

In January, the housing research firm John Burns Real Estate Consulting surveyed more than 400 flippers to get a better idea of what was going on in the market. The respondents appeared to be optimistic about their future profits and indicated that they believed the fix-and-flip market was expanding. Their biggest problem, they said, wasn’t materials or labor costs, but the lack of available inventory.

But there was one statistic that puzzled CEO John Burns. 

Forty-three percent of the respondents said the after-repair value, or ARV, of their flipped homes — a crucial metric in the flipping business — was coming in above their original forecasts. Burns had expected that percentage to be higher. 

“I was surprised that a lot of them weren’t selling the home for more than they thought they would,” Burns said. 

People may still be turning a profit for now, thanks to home-price appreciation, Burns said. After all, most respondents — 52% — said their original forecasts matched their actual ARV, leaving only 5% who reported that their homes were ultimately worth less than what they expected they would be after renovations. 

“But what happens if there’s no price appreciation and your costs were higher?” Burns said. “There’s a lot of debt available to these people, too.”

Homes flipped last year generated a median gross profit of $56,000, or a 31% return on investment, Attom reported. That’s the lowest gross margin since 2008 and the steepest decline in return on investment since at least 2005, Attom said.

Attom’s gross-profit estimate was calculated by finding the difference between the median price flippers originally paid for a property and the amount they ultimately sold it for. It doesn’t take into account other expenses, such as mortgage interest, property taxes, and renovations, which significantly eat into margins. 

There may have been other factors that ultimately protected flippers’ net profits despite the tightening market. Sharga said investors took less time to flip homes, which could translate to lower renovation expenses and other holding costs. 

But the data from Attom suggested that flippers could be facing less breathing room when making deals. Indeed, the opportunity to buy an older home, spend $5,000 on paint and a new carpet, and turn a quick 25% net profit on the sale “is just not there anymore,” said Noah Martin, the president of AlphaFlow, a company that buys fix-and-flip loans from private lenders and funnels them to Wall Street. 

“There’s going to be a higher and higher threshold for success in the flip deal,” Martin said. 

Savvy flippers usually avoid factoring in home-price appreciation when putting together their budgets. Instead, they base their projected profit on the value added by their improvements so that they turn a profit even if home values don’t rise in the interim. 

That’s the philosophy preached by Lauren Ahrens and Lincoln Edwards, a home-flipping duo in Austin, who have branded themselves as the Austin Flipsters. 

The pair has flipped hundreds of homes in Austin’s booming real-estate market and is now parlaying that success into a growing media business. They’ve amassed more than 246,000 subscribers on YouTube, where they serve up a steady stream of HGTV-style videos documenting their flips. They also recently began offering subscribers the opportunity to partner with them on their own fix-and-flip projects. 

James Rodriguez/Insider.

In a market such as Austin, where home prices were up 21.9% year over year as of March, the real-estate brokerage firm Redfin said, it’s becoming much harder to find properties that make sense to flip because “everyone’s overpaying” for homes, Edwards told me. 

“We will never do a deal based on projections that the market will increase in the meantime,” Edwards said. “We have to do it based on the comps today, what we can actually prove it can sell for today. And if we get upside, if we get gravy, great. But I see people out there that say, ‘Oh, well the market’s going up 20% a year or whatever, so if you factor that in, it’s a deal.’ That’s very risky, very scary.” 

Even the Flipsters say they’ve been bailed out by rising home prices a couple of times. The basic tenet of flipping is to get in and get out as quickly as possible, Ahrens said, but that’s easier said than done. 

“You have permitting issues, or contractor issues, or back-ordered materials, and so it ends up taking longer,” Ahrens added. “That in theory would work as a disadvantage, but for this market, it’s like the longer you hold it, the better it does.”

The worst-case scenario for any flipper is being forced to sell at a loss, an outcome that the Flipsters say they’ve so far been able to avoid. Others, of course, aren’t so lucky. Some flippers have been forced to become accidental landlords, holding on to a home and collecting rent in the hopes of one day selling it at a higher price.

Of course, the existential crisis that all home flippers face is the possibility of the US economy and the housing market hitting the skids. While most economists predict that home prices will continue rising through the year, concerns for a potential housing bubble are mounting as the Fed keeps raising interest rates to combat high inflation. In expensive coastal markets, such as California, there are already early signs of a market cooldown, Redfin said. A growing number of experts also fear a recession is looming, which could send the housing market into a tailspin. 

Flippers are here to stay, but not all of them

Even in the event of a market slowdown — or crash — home-flipping won’t go away entirely. In the depths of the financial crisis, in the third quarter of 2008, flips still accounted for almost 5% of all US home transactions, Attom said. That was down from a high of about 9% in 2006, but only slightly less than the 5.5% seen in 2021. 

“There’s always some house that somebody let go for a long time,” said Beth O’Brien, the CEO of CoreVest Finance, which provides loans to real-estate investors. “And so those are always good flip opportunities, which are very cycle independent.”

Flippers will adapt to available inventory, O’Brien said. Homes that require light upgrades, such as a new coat of paint or new carpet, have gotten harder to find, so flippers are turning to more intensive projects, such as building an addition or even scrapping the structure and starting fresh. Those projects require more money, but they can also generate returns to match. 

“The kind of ‘heavier lift’ assets, like urban infill or more obsolete housing, are still available,” O’Brien said. 

McLaughlin, the chief economist at Kukun, divides flippers into two categories: speculators chasing home-price growth and value-add investors carrying out substantial renovations. 

“When price growth decelerates, we’re bound to see a pullback in flipping activity,” McLaughlin said. “First, it’s likely to be speculators that will pull back, because that’s the only thing they’ve got going for them. But if price growth falls enough, then you’re also going to see some pullback in value-add flipping.”

And as the specter of a broader housing market correction grows, people who hold real estate for short periods of time are at the most risk in the event that things turn ugly, said Devyn Bachman, the senior vice president of research at John Burns Real Estate Consulting. 

“The first group that automatically comes to my mind is the fix-and-flip industry,” Bachman said. “That industry tends to own homes for less than a year, so if you go through any sort of pricing correction, and they bought at any peak period, and then try to sell quickly thereafter, they may lose money in that transaction.”

The bottom line, as always: Prices can’t rise like this forever. 

“The party is going to come to an end,” McLaughlin said. “I don’t think the party’s over just yet. But it’s certainly not the early stages of the party, I’ll tell you that.”

---

James Rodriguez is a real estate reporter for Business Insider.