Marty Boardman was sitting in his home office in August 2007 when he realized his life would never be the same.
As a budding real estate investor and home lover, Boardman took advantage of the US housing bubble, building a small real estate “empire” after stepping away from his job as a broadcaster.
But after home prices peaked in early 2006, the real estate market became increasingly unfavorable for investors. And eventually the housing bubble burst, leaving home flippers like Boardman out to dry and triggering a global financial crisis.
“I will never forget it. The music had stopped and I didn’t have a chair,” he said Condition.
Since then, Boardman has rebuilt his business, diversified geographically and started offering advice to fellow home lovers on how to use foreclosures to turn a profit.
But now he and other seasoned flippers and housing analysts are warning that a new generation of novice housing flippers could be in trouble as mortgage rates soar and the housing market enters what Fed Chairman Jerome Powell calls a “tough correction’. Economists and analysts have also repeatedly cut their forecasts for home prices this year. Moody’s Analytics, for example, now expects a 10% decline in home prices across the country.
The economics of flipping are simple: a flipper makes a profit when he sells his “flip” above the total cost of securing the home and remodeling it. While flippers add economic value by remodeling homes, during periods of booming home prices, home appreciation is often their biggest source of profit. Conversely, if housing prices start to fall, flippers can easily see their flip pushed into the red. Put simply: It’s easy to see why the changing housing market doesn’t bode well for the naysayers.
Bruce Bartlett, a veteran real estate investor and home hobbyist with more than 20 years in the business, fears that the coming house price correction will “destroy the herd” of inexperienced hobbyists who have entered the market over the past few years amid the rise of HGTV home shows.
“Not everything is rosy. If you don’t have experience, it will be very difficult,” he said Condition. “We’ve been in a low interest rate environment for the last 15 years and it’s going to be a challenge for everyone to recalculate.” This will destroy the herd. Smaller fins will go out of business.”
House flippers are pulled back
With rising mortgage rates and labor costs, it’s getting more expensive to flip a house. Add falling home prices and low inventory to the mix and it becomes a toxic situation for even the most seasoned flippers.
As a result, many of the more experienced players in the industry are becoming more conservative.
“For flippers, I think we’re all cautious. We are now seeing some price cuts. So we build into our model the possibility of additional price adjustments.” Bartlett said, noting that predicting potential sales prices for rehab homes has become a challenge in recent months.
Bartlett gave the example of a larger home he wants to flip in Beverly Hills. Higher-value homes tend to take longer to renovate and sell, so Bartlett was trying to predict what prices in the area would be like three years from now.
“We’re very aware that we’re not going to be able to make that assessment,” Bartlett said. “So we’d better give ourselves plenty of wiggle room.”
Shortly after the boom of the housing pandemic, hobbyists and professionals poured into the market. The opportunity to accumulate record levels of appreciation while they were flipping homes was just too good a deal to pass up. In fact, housing flips during the pandemic jumped to levels not seen since the housing boom of the 2000s.
Although it will take time to show up in the data (see chart above), this home flipping boom has already begun to recede.
Darren Bloomquist, vice president of market economics at Auction.com, the nation’s largest seller of bank-owned residential and foreclosed properties, said Condition that he has seen evidence of this more conservative approach from flipper’s in the dramatic change in buyer behavior on his platform over the past six months, where 60% of buyers are home flippers.
“We’re definitely seeing our bidders being much more conservative,” says Blomqvist.
An ominous prospect – some fins may suffer heavy losses
To be clear, most of the home flippers and analyzers Condition spoke to believe the current home flipper market isn’t as bad as it was in 2007. However, they believe rough waters are ahead.
Auction.com’s Blomquist said he has seen an increase in smaller home fins on his platform over the past few years, and that if fins continue to be “too speculative” in the current challenging market, there will definitely be “failure.”
“This is a potential ‘catch-the-knife’ environment that they will resell over the next three to six months,” he said.
The markets where flippers are most at risk of major losses? Boomtowns.
Just like in 2007, the fastest pullback is happening right where flipping grew the most during the housing boom. Look no further than Phoenix. The number of flipped homes in Phoenix is already down 60 percent since March, according to data provided to NBC’s local news affiliate in Phoenix by The Cromford Report. The reason is simple: Many Phoenix residents are holding back on new purchases in the face of Phoenix’s rapidly changing housing market.
“The places that thrive the most are going to be the places that are the worst,” Logan Mohtashami, lead analyst for HousingWire. “Boise, Phoenix, those types of areas are level one red alert, danger, danger to finners because those are the areas that actually have supply where in other parts of the nation we just don’t see that.”
On the one hand, it’s positive that industry insiders don’t expect fins in 2022 or 2023 to be sold amid the oversupply or foreclosure crisis of 2008. On the other hand, it means that the changing housing market is unlikely to produce the volatile deals that the recent housing downturn brought.
Not only did the distressed sales of the 2008 era create opportunities for rehab, but the downturn in the housing sector led to less competition. The amateurs left, and the professionals who managed to buy homes at deep discounts feasted.
“It’s a much more troubled environment now than it was when credit was collapsing in 2005, 2006, 2007 and 2008 and the job-loss recession happened. Because over the next few years you had distressed properties coming into the system wholesale. So it was like a paradise period for finners,” Mohtashami said. “But here [in 2022 and 2023]it’s a lot different.”