Modernizing aging homes boosts supply and can make housing more affordable. - Getty Images
President-elect Donald Trump’s housing policy is beginning to take shape — and affordability will be a top priority. Trump campaigned on cutting mortgage rates and reducing regulations for builders, at one point holding a rally in front of a giant sign that said: “Make Housing Affordable Again.”
Now the serious work of converting campaign promises into government policy begins.
The biggest cause of the housing crisis is a lack of inventory, and building more homes is clearly a critical part of the equation. But it’s simple math that building alone won’t solve this crisis. The shortfall between supply and demand for homes is estimated to top 7 million units, which means that even an ambitious goal of building 3 million more units won’t even get us halfway there.
But there’s another piece of the puzzle that isn’t talked about enough: With so much of America’s housing stock built in the 1950s, 1960s and 1970s, millions of U.S. homes are long past their prime. Improving existing inventory is essential. The government invests in rebuilding highways and other infrastructure — so where is the focus on remodeling housing?
The potential of revitalizing aging homes to increase the supply — and ease the affordability crisis — is enormous. According to the 2022 American Community Survey, more than 89 million homes in the U.S. are at least 35 years old, representing 62% of the total housing stock. Many of these homes are in dire need of modernization and renovation.
There is a largely hidden economy of entrepreneurs across the country working to bring these older homes back online. They are popularly known as “flippers,” though that term has taken on a mixed reputation due to endless cable TV shows that either glamorize or distort the industry.
The truth of the house-flipping economy isn’t glamorous. It’s composed of entrepreneurs who turn outdated, often vacant properties into modern, desirable homes. The vast majority of revitalized homes aren’t turned into luxury products; they are designed for individuals and families looking for affordable, quality places to live.
So how can the U.S. spur this activity? Here are some ideas for a crucial space where there hasn’t been enough policy creativity:
1. Treat ‘house-flipping’ profits as capital gains: Opportunity Zones were created in 2017 to give investors assistance in investing in distressed areas of the country. Scott Turner, Trump’s nominee to head U.S. Housing and Urban Development (HUD), is the former executive director of the White House Opportunity and Revitalization Council. Turner worked extensively to advance the Opportunity Zones program. If he and lawmakers are looking to update and expand this economic development tool, they may want to consider incentivizing house-flipping in those zones. This would help improve the housing stock while encouraging value-creating small businesses. A simple tax incentive could be to treat flipping profits as capital gains instead of the ordinary gains they are normally categorized as.
2. Expand the Fannie and Freddie mandate: There have been reports of plans to consider privatizing Fannie Mae FNMA and Freddie Mac FMCC. Whether or not that occurs, the U.S. may benefit from these companies carving out a portion of their portfolios for structured finance products including “fix-and-flip” loans. The result would be taking a fairly opaque market with a high cost of capital and significantly lowering the cost of a loan — leading to increased investment and more improved homes.
3. Extend SBA loans to flippers: While the Small Business Administration (SBA) has a range of loan schemes that support entrepreneurs starting and scaling small businesses, there are no designed programs that flippers can use to readily finance their business expenditures, including purchasing and renovating homes. The government supports business-owned real estate and other inventory assets under the SBA — so why not do the same for revitalizing homes? If the SBA were to update the mandate for an existing offering or create a new class of loans for this sort of economic activity, then the barrier to entry for flipping would be significantly reduced.
These are just three ideas. No doubt countless others exist. Regardless, it’s hard to credibly argue that flipping doesn’t have a role to play in solving the housing affordability crisis.
The great news is that the private markets are operating as one would hope in a time of need. Over the past few years, even as overall housing market transactions have slowed, flipping is accounting for a growing and significant share of home sales— up to almost 10% of all transactions from 6%-7% in recent years, despite a lack of government policy support.
In addition to revitalizing properties that have reached the end of their lifespan, flippers can add supply quickly — often in a matter of months, whereas large-scale construction projects can take years. Plus, house flipping is a reliable source of jobs, from construction work to real-estate agents, property managers and others, serving as an economic engine for communities.
It’s obvious that America needs more homes. In seeking a solution to that problem, we shouldn’t ignore what’s in front of us. Many of the homes we already have are built on solid foundations in vibrant communities. Revitalizing these homes could play a major role in solving the housing affordability crisis.
Joshua Ernst is the CEO of Backflip, a real-estate fintech company focused on buyers who purchase and renovate single-family homes (“flipping”).
