House flipping is popular only when there’s profit to be made. For the model to work, the market needs to support it. And today’s overall housing market doesn’t. Don’t believe it? One indicator is the amount of materials being sold to renovate homes. Just ask Home Depot (NYSE: HD) whether customer demand for do-it-yourself (DIY) products is up or down. (Spoiler alert – it’s down.)
Home Depot’s numbers
Sales at Home Depot stores did rise in the second quarter of 2021. They were up 3.4%, which sounds decent. But when you compare this figure to last year’s at this time, when there was a 25% rise in sales, you can see the home improvement party is ending.
Analysts figured home renovation sales wouldn’t hit levels experienced during the pandemic when much of the country was home during lockdown, but the sales figures for this quarter are worse than expected, since analysts predicted the rise in sales would be 4.9%.
The demand for DIY projects being down this quarter might have little to do with house flippers – it could just be from homeowners who aren’t renovating their primary homes as much this year since they’re no longer sheltering in place. But data from Attom, a provider of nationwide property data, backs up the theory of Home Depot’s renovation material sales being an indicator of house-flipping activity.
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Property data from Attom
Attom reports that home flipping rates fell in the first quarter of 2021 to 2.7% of all homes sold, or about one in 37 transactions – down significantly from the first quarter of 2020, where 7.5% of homes sold were flips, representing about one in 13 homes.
There’s really only one reason for a drop this big, and that would have to do with profits. And indeed, both profits and profit margins have declined in the house-flipping business so far this year, despite the fact that homes have been selling like hotcakes and for top dollar.
When house flipping peaked
House flipping peaked in 2005. That year, 8.2% of houses sold were flips. In some markets where the housing bubble was extreme, like in parts of Florida and Las Vegas, the rate of houses sold that were flips skyrocketed to 19%.
The formula for house flipping was ideal then: It was easy to get financing, and the housing bubble was fast inflating. Flippers in those days didn’t even need to put much – or any – money down to get a house (leading to unprecedented defaults by investors), and flippers didn’t need to renovate in many cases to sell for a profit.
After the crash, flippers still fared well as a wave of foreclosures put thousands of homes on the market that had just plummeted in value. By 2011, however, profits for flippers reached a low point, as people – still reeling from the aftereffects of the housing crash – were unable to buy homes.
What’s different today?
Interest rates are low, and home prices have been rising. But still, it’s more difficult to make money today flipping homes. There’s more competition to buy and fewer homes on the market.
The gross profit on a flip in the first quarter of 2021 was $63,500, representing a return on investment of 37.8%. This is down a whole percentage point from the first quarter of 2020, where the average ROI was 38.8%. Profits were down partly because the median price of a flipped house fell 3.9% from the fourth quarter of 2020 to the first quarter of 2021 – $241,000 in the fourth quarter of 2020 to $231,500 in the first quarter of 2021.
Biden administration announces affordable housing steps
It’s likely to get even more difficult for house flippers moving forward in the face of news announced Sept. 1 from the Biden administration. As part of its Build Back Better program, primary homebuyers of single-family homes will be prioritized over investors. This, however, applies only to certain FHA-insured and HUD-owned properties.
The Millionacres bottom line
Although house flipping is no longer a no-brainer regarding making a profit, as it once was, it can still be a profitable business for investors. It appears to be best to focus on a particular area.
For example, in the first quarter of 2021, flippers in some areas saw large increases in their profit margins. For example:
- Springfield, Missouri (up 120%)
- Provo, Utah (up 118%)
- Omaha, Nebraska (up 101%)
- Lynchburg, Virginia (up 101%)
- Pittsburgh (up 88%)
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