Rising home prices are bringing more house flippers out of the woodwork, and that may be a sign of an overheating housing market. The number of active home flippers last year was the highest in nearly a decade, and it is only growing.
Nearly 180,000 family homes and condos were flipped in 2015, according to RealtyTrac. A flip is defined as a home that is bought and sold again within the same 12 months. Flips made up 5.5 percent of all sales last year, and that is the first increase in the flip share after four years of shrinking. Flipping increased in 75 percent of U.S. markets, and the profits are growing as well.
"As confidence in the housing recovery spreads, more real estate investors and would-be real estate investors are hopping on the home flipping bandwagon," said Daren Blomquist, senior vice president at RealtyTrac. "Not only is the share of home flips on the rise again, but we also see the flipping trend trickling down to smaller investors who are completing fewer flips per year."
Jim Pinson works with investors to flip houses on the south side of Chicago and does two or three flips of his own each year in the Oak Lawn area. Home prices in Chicago have not soared as much as in other parts of the nation, but there are still a lot of distressed homes available for sale, and plenty of investor demand.
"Oh my God, there are multiple offers on almost every decent margin profit house that pops on the market," said Pinson.
The concern now is that prices are rising too fast, not because buyers can afford to pay more but because of extremely short supply of homes for sale, especially on the lower end of the market. Home prices in January were 6.9 percent higher than the January 2015, according to CoreLogic, a higher annual gain than in December. Home flipping can push prices artificially higher, especially in markets with the tightest inventory.
"When home flipping numbers go up, it is usually an indication that the housing market is in trouble," said Matthew Gardner, chief economist at Windermere Real Estate in Seattle, who was quoted in the RealtyTrac report.
That was the case during the housing boom in the mid-2000s, but at that time flippers were putting next to no money into their investments, instead using cheap credit. That credit no longer exists. They have to put significant money into their flips, even when using investor loans.
"More inexperienced home flippers with a smaller financial cushion could be a sign of an over-speculative market, but the data indicate that flippers in 2015 continued to operate within relatively conservative margins," said Blomquist. "Homes flipped in 2015 were on average purchased at a 26 percent discount below estimated market value and resold by the flipper at a 5 percent premium above estimated market value."