Overall, the share of real estate investors is shrinking, but the flipping segment reveals new expansion to squeeze returns out of fast-rising home prices before they level off.
RealtyTrac's Midyear 2013 Home Flipping Report documents 136,184 single family home flips in the first half of 2013, up 19 percent from a year ago and up 74 percent from the first half of 2011. RealtyTrac's definition of a home flip is a property that's purchased and sold again within six months.
The national median home price for all existing home types was $214,200 in June this year, up from $173,600 in January, six months earlier, according to the National Association of Realtors. That's an increase of more than 23 percent, over the six-month period.
Buy Low, Sell High
Real estate investors who flipped homes in the first half of the year typically landed the deal at a discount of five percent off estimated market value on average, and sold them at a premium of one percent above estimated market value on average, according to RealtyTrac.
RealtyTrac puts the flipping return at an average nine percent of the initial purchase price ($18,391) for single family home flips in the first half of the year.
That's an 18 percent annualized return if you assume the flippers hold properties for six months. The faster the flip, the higher the return.
Rising Prices, Rising Profits
Anyway you slice it, the draw for flippers is the larger return that has come with rising home prices. The $18,391 return was up a whopping 246 percent from an average gross return of $5,321 in the first half of 2012 and an average loss of -$13,206 in the first half of 2011, according to RealtyTrac.
Flippers have also gotten a boost from the Federal Housing Administration (FHA)'s four extensions on it's anti-flipping rule waiver. The waiver, now good through 2014, makes it easer for flippers to do their thing with FHA-insured properties.
In 2003, with the onset of skyrocketing home prices, the FHA banned flipping FHA-insured properties within 90 days of their purchase to prevent flippers from targeting unsuspecting borrowers with artificially-inflated prices, actions that contributed to unsustainable home price increases.
However, recognizing how much worse off the housing market would be without investors flipping, the FHA first waived the anti-flipping rule in 2010.
However, this could be the last hoorah for the flipping segment. Double-digit home price increases won't last forever and many investors are already leaving the market in advance of price stabilization.
The July 22 Campbell/Inside Mortgage Finance HousingPulse reports for June, the investor share of home purchase transactions fell to 19.7 percent, down from a 23.1 percent share found as recently as February and the lowest level recorded since September of 2012.
Investors are making less money now that home prices are rising. Flipping is even less profitable in some areas where the expense of buying (as mortgage rates rise), carrying the property and fixing it up could wipe out returns on the investment.
"While flipping continues to be profitable in most markets, particularly those where the home price recovery is still nascent and a recent rebound in foreclosure activity allows investors to find distressed inventory at a discount, home flipping is tapering off in markets where fewer of those distressed bargains are available," said Daren Blomquist, vice president at RealtyTrac.
The share of distressed property sales - foreclosures and short sales - plunged from more than 40 percent a year ago to about 28 percent in June, the lowest distressed property share recorded in more than least three, according to the Housing Pulse report.
Blomquist added, "Out of the 100 markets we analyzed for the report, 32 had declining flipping numbers, including perennial flipping hot spots like Las Vegas, Phoenix, Southern California and Atlanta. Still, flipping was on the rise in more than two-thirds of the markets, including New York, Washington, D.C., Chicago and several Florida metros."