In the most recent Capital Letter, I wrote about the problems facing the housing market, which is, as I explained, more or less frozen at the moment. When it unfreezes, my best guess is that it will decline, and, over time, relatively sharply. The best chance, I suspect, of avoiding a sharp decline — or minimizing the duration of any decline — is that homes come to be seen as an inflation hedge. For that to occur, inflation will have to be more persistent than is currently expected (although so far as that is concerned, it’s worth noting some words of caution coming out of the Fed). That’s rather cold comfort.
Meanwhile, in another sign of approaching trouble, it appears that flippers (normally defined as speculative buyers who buy and sell homes, often after a renovation, within a twelve-month period) are looking at a much tougher market.
As the housing market cools quickly, house flippers are finding it harder to make fast profits.
In the third quarter, gross flipping profit, which is the difference between the median purchase price paid by investors and the median resale price, dropped to $62,000, according to ATTOM, a real estate data provider. That’s down 18.4% from the second quarter and down 11.4% year-over-year. It represents the smallest profit since the end of 2019 and the fastest quarterly drop since 2009.
With that drop in gross profits, the return on investment fell to 25% from 30% in the previous quarter. Not bad, but not as good. Still ATTOM notes it’s not the size of the profits, but how quickly they’re falling.
With profits shrinking and higher mortgage rates hurting affordability for potential buyers, the share of home sales that were flips fell as well. Roughly 7.5% were flips in the third quarter, still historically high, but down from 8.2% in the second quarter. Flips, defined as homes bought and sold in a 12-month period, made up a 5.9% share of all home sales in the third quarter of 2021.
Another sign, I reckon, of trouble to come.