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SALT LAKE CITY — The U.S. housing market has turned, and it's starting to backfire on home flippers.
Mortgage rates are now hovering around 7%, further straining housing affordability and pricing buyers out of the market. Meanwhile inflation continues to pressurize labor costs, sending home building and renovations skyward. Home prices are starting to dip as sellers recalibrate their listing prices for falling demand, and even though inventory is starting to boost, it's still lingering at low levels.
That's a recipe for disaster for home flippers.
What's happening: While experienced flippers are starting to pull back, Bruce Bartlett, a veteran real-estate investor and home flipper, told Fortune he fears the shifting market will "cull the herd" of rookie flippers that only entered the market in the last few years as home prices skyrocketed and as HGTV home flipping shows have gained popularity.
"It's not all roses. If you're inexperienced, it will be very difficult," Bartlett told Fortune. "For the last 15 years we've been in a low interest rate environment, and it will be challenging for everyone to recalculate. This is going to cull the herd. Lesser flippers are going to leave the business."
OpenDoor, a company that innovated an online form of home-flipping called iBuying, lost money on 42% of its transactions in August, Bloomberg reported last month, citing research from YipitData. The losses were even worse in rapidly cooling local markets including Los Angeles (55%) and Phoenix (76%).
An interesting historical look at U.S. home flipping trends. Notice the sharp incline in 2021, and rates of home flipping today is are higher than they were in 2005. Via ATTOM https://t.co/xa7bP8HY5Y#utpol#utecon
— Katie McKellar (@KatieMcKellar1) October 12, 2022
#housingmarket#housingcrisispic.twitter.com/2kHFf1BrDs
Home flipping sales: Across the U.S., 115,198 single-family houses and condominiums were flipped in the second quarter of 2022, representing 8.2% of all home sales, or one in 12 transactions, according to a September report by real estate data curator ATTOM. That's down from almost 10% — or one in every 10 home sales — in the first quarter of 2022, but it's still up from 5.3% in the second quarter of 2021.
"Despite the decline, the home-flipping rate during the second quarter of this year still stood at the third-highest level since 2000, below the high point registered in the first quarter of 2022," the ATTOM report states.
While Rick Sharga, ATTOM's executive vice president of market intelligence, said home flipping is still seeing a "strong showing" — with the second-highest total ATTOM has recorded in the past 22 years and the highest-ever median sales price of flipped properties at $323,000 — what's unclear is how long it will last.
"The big question is whether the fix-and-flip market will begin to lose steam as overall home sales have declined dramatically over the past few months, and the cost of financing has virtually doubled over the past year," Sharga said.
Is home flipping still profitable? Timing is everything. Those who bought right before rising mortgage rates had a swift and dramatic impact on the market are likely grappling with the reality that they'll have a tougher time selling than in 2021, when sellers were seeing bidding wars among frenzied buyers. Home prices also aren't accelerating at rapid rates, and predictions are mounting that 2023 will bring year-over-year price declines.
All this means it will be increasingly difficult for home flippers to turn a profit.
Business Insider reported earlier this week that home flippers are "feeling the pain," now slashing prices or deciding to turn their properties into rentals. Earlier this spring, the outlet reported experts considered home flippers among the investors most exposed if the housing market took a turn.
"The first group that automatically comes to my mind is the fix-and-flip industry," Devyn Bachman, the senior vice president of research at John Burns Real Estate Consulting, told Insider in April.
"That industry tends to own homes for less than a year, so if you go through any sort of pricing correction, and they bought at any peak period, and then try to sell quickly thereafter, they may lose money in that transaction."
Today's mortgage rate: As of Monday, the average rate for the benchmark 30-year mortgage was 7.04%, according to Bankrate.com.
