As housing market cools, home flipping shows signs of decline

Since the housing collapse 10 years ago, home flipping has been a lucrative practice. Investors have been able to buy homes at a relative discount, and steadily rising home prices have created a favorable environment for making short-term investments in buying, renovating, and selling a house.

But with home prices beginning to hit a wall in markets across the country—particularly on the West Coast—home flipping has started to slow down, according to numerous pieces of data from ATTOM Data Solutions, a real estate data tracking company.

The volume of home flips year-over-year were down by 18 percent across the country in August, marking the third time in the last six months home flipping has dropped by double-digit percentages year-over-year. In California, it was down 22 percent in August, the fifth time in the last six months there’s been a double-digit percentage drop in the Golden State.

What’s causing this drop? Home prices have been steadily rising since the housing market bottomed out after the financial crisis in 2008, but various signs in housing data over recent months point to home prices having finally risen beyond people’s capacity to pay.

This is evident in supply of homes for sale spiking across the country. This trend has been most prominent in West Coast markets, which have been among the hottest in the country over the last five years. In those same markets, home sales have been falling, and the pace at which home prices are rising has started to slow down.

All this suggests that despite strong demand and good economic fundamentals, home prices are too high with properties lingering on the market longer. If this continues, price drops could be next.

The housing market slowdown is already beginning to impact house flipping, as the supply spike nationwide makes home flips harder to sell. According to ATTOM, the average number of days it takes to flip a home—or the time between buying and selling the house in a home flip—has risen to 186 days, the longest since June 2006. In California, it’s hit 190 days, the longest since July 2007.

Home flippers count on rising home prices to make for an orderly exit after they renovate a property. If home prices are holding steady or falling in the near-term, it’s more difficult for flippers to profit.

Historically, home flipping has been antiquated local business, meaning a market downturn would affect mainly local bigwigs and property renovators. But over the last 10 years, Wall Street firms have started bundling home flip loans into bonds the same way they do with mortgages to create mortgage-backed securities.

Meanwhile, tech platforms allow investors to invest directly in individual home flips. While they don’t like being called home flippers, Opendoor and Offerpad, the so-called iBuyers, buy houses from motivated sellers at a “fair market price,” renovate them, and then sell them on the open market. A home flipping downturn would be the first test for the companies and financial instruments that have institutionalized home flipping.

Rampant home flipping is often cited as a contributor to the housing bubble that inflated prior to 2008. Flippers would buy a property without doing much renovation and then sell it a short time later. But advocates for home flipping say renovations today are much more robust and provide a much-needed refresher to aging housing stock.