Upside to Home Flipping Decreases as Prices Rise

Carrie Rossenfeld Residential & Mixed Use

Two residential real estate reports released this week show that home prices are continuing to rise, creating a dampening effect on the returns of home flipping.

According to a release on Business Wire, CoreLogic reports that its CoreLogic Home Price Index (HPI™) and HPI Forecast™ for October 2018 shows home prices rose both year over year and month over month. Home prices increased nationally by 5.4 percent year over year from October 2017, and on a month-over-month basis, prices increased by 0.5 percent in October 2018.

In addition, a release from a representative of ATTOM Data Solutions cites a report that finds average home-flipping returns dropped to a 6.5-year low in Q3 2018, the share of flips sold to FHA buyers was at a more-than-10-year low, and the share of home flips purchased with financing decreased from a 10-year high in in Q2 2018.

Moreover, CoreLogic’s release says its HPI Forecast indicates home prices will increase by 4.8 percent on a year-over-year basis from October 2018 to October 2019, and on a month-over-month basis, home prices are expected to decrease by 0.7 percent from October to November 2018.

The CoreLogic HPI Forecast is a projection of home prices calculated using the CoreLogic HPI and other economic variables. Values are derived from state-level forecasts by weighting indices according to the number of owner-occupied households for each state.

Two factors are leading to a slowdown in home-price appreciation. Dr. Frank Nothaft, chief economist for CoreLogic, is quoted in the release as saying, “Rising prices and interest rates have reduced home-buyer activity and led to a gradual slowing in appreciation.” He adds that October’s mortgage rates were the highest in 7.5 years, eroding buyer affordability, but renters still want to buy homes in order to “build wealth through home-equity growth, especially in areas where rents are rising quickly.”

As for home flipping, Daren Blomquist, SVP at ATTOM Data Solutions, is quoted in the firm’s release as saying, “Home flipping acts as a canary in the coal mine for a cooling housing market because the high velocity of transactions provides home flippers with some of the best and most real-time data on how the market is trending.”

Blomquist adds that the market has now seen three consecutive quarters with year-over-year decreases in home flips. “The last time that happened was in 2014 following the mortgage rate jump in the second half of 2013, but it’s still far from the 11 consecutive quarters with year-over-year decreases in home flips extending from Q2 2006 through Q4 2008 and leading up to the last housing crash.”