The share of resales by home flipping investors accelerated dramatically as 2022 got underway, but activity could be on the verge of slowing down due to a declining return on investment.
In jumps that were the largest on a quarterly and annual basis since 2000, the first quarter’s flipping share of all home resales rose to 9.6% from 6.9% in the fourth quarter of 2021 and from 4.9% in the same quarter a year earlier, according to Attom Data Solutions.
However, plummeting profit margins may signal a forthcoming shift. Returns on sales dropped to 25.8% in the first quarter from 27.3% the previous three months, and 38.9% during the last quarter of 2021.
While flippers and other buyers investing in housing generally don’t want to miss out on any continuing appreciation, they likely will be thinking more carefully about their participation with returns slowing.
“If you are that institutional investor, you’re looking at all the markets you’re in, and you’re trying to make a determination: Is this a market that, in a significant slowdown, is going to start to see stress?” Doug Duncan, chief economist at Fannie Mae, said in a recent interview.
Several recent housing market analyses suggest prices could be peaking in some areas and that investors could become more selective in the future.
Buyers have been paying premiums of 50% or more over historic trends in 15 of the 100 largest markets, according to a recent study by two Florida universities. Also, homes in 88% of metropolitan areas have price-to-income ratios above their 15-year averages, according to Standard & Poor’s. In addition, more than half of investors have identified housing markets they’ve been active in as overvalued, according to a recent Auction.com survey.
Questions about prospects for home flipping began as early as last year when Zillow closed a flipping unit that utilized an algorithm-based pricing model. But since then, other players active in the sales or financing of flipped homes, like Opendoor and Redwood Trust, rededicated themselves to the business.
Investors are more likely to pick their spots than exit on a large scale in this environment, according to Duncan.
“I don’t see wholesale exits like somebody selling 500,000 homes in a month,” he said. “I don’t see that happening, but I would see, market by market, the institutional investors trying to understand the dynamics of the markets they’re in and make some sort of .rmed view of what’s next.”
It remains to be seen whether any pullback by investors could help first-time homebuyers that have been competing with them for properties in a market w. incomes have been strained by inflation and rising rates, but household formation is still outpacing available inventory.
Some homes that get flipped do end up in the hands of consumers who use government-insured loan programs to address affordability constraints they have, but the share that do has been falling.
The percentage of flipped homes that went to borrowers who use Federal Housing Administration-insured financing declined to 7.9% in the first quarter, compared with 8% in the previous three months and 9% a year ago.
The fact that some fix-and-flip homes do end up in the hands of FHA borrowers is a reminder that investor participation in the housing market can have some benefits for consumers.
“Certainly, t.’s been a lot of frustration among housing folks about the participation of the institutional investors for out-paying first-time homebuyers, but that’s, to me, all derivative of the shortage of houses in general,” said Duncan. “I see their function simply as a function of the structural position of the housing market.”