Home-Flipping Collapses in San Francisco, Losses Spread

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Home flippers are hardy folks who dive head-first into housing markets to buy homes at a discount from estimated market value, rehab them if they have to, trim the trees and cut the weeds out front, and flip the unit in less than a year, hopefully at a premium over estimated market value. If all works out, they’re rewarded with fat returns on investment.

It involves leverage, so some of the risks get shuffled off to the lender. It involves skills, connections, knowledge, and a good dose of luck. Above all, it requires the ability to buy low and sell high. To take home some serious dough, flippers need to purchase at double-digit discounts below “estimated market value” (based on AVM) and add enough value to sell at a premium over estimated market value. In the intervening months, home prices must also jump. So double-digit home price increases over the last two years have made flipping a lot more profitable. And easier.

This is the magic mix. If the conditions are met, the equation works out. It not, it’s a leveraged bet that can go to heck in a hand basket.

But flipping has started to run out of air in much of the country. And in the multi-county metro area of San Francisco, flipping collapsed in the second quarter, and flippers for the first time in years, started wading into red ink.

Home sales in the US have been declining since last fall, with mortgage applications plummeting at double-digit rates year over year. All sorts of excuses were dragged out of the closet, from tight inventories to bad weather, until inventories started to balloon and the weather was gorgeous, and sales were still dropping. Now it’s perfectly clear even to the most recalcitrant economists why: soaring prices have moved homes out of reach for many potential buyers. At first, the swoon in unit sales didn’t seem to have any impact on prices. But now the inevitable is happening: over the last few months, price increases have shriveled before our very eyes, and in some markets, on a monthly basis, outright price declines have started to crop up.

On Friday, in a section ominously titled, “Price Drops: ‘There’s Blood in the Water,’” Redfin reported on the growing prevalence in July of sellers having to lower listing prices as homes, rather than stirring up bidding wars, sit around for weeks or months. Redfin expects this trend to continue, with prices “potentially” declining month over month in September and October. “If that happens, it will be the first three-month price decline since the fall 2012,” it explained.

And our hardy home flippers, who dive head-first into these markets? They’re the first to notice when the water has been drained out of the pool. And flipping as a business model is suddenly no longer so appealing. Home sales overall are dropping, and flipping as a percent of total sales has swooned, and profits have come under pressure, and the time it takes to flip a home has soared, and year over year the volume of flips has plunged 61%. Money no longer grows on trimmed trees, freshly painted walls, and rehabbed bathrooms [read…  The Home-Flipping Bubble Implodes].

But real estate is local, and some flipping markets have been getting hit particularly hard while others still manage to hang in there.

In a new report, RealtyTrac listed the ten best and the ten worst markets for flipping in the second quarter. Across all markets, according to the report, flippers on average were able to buy properties 8% below their “estimate market value” (AVM) and sell them at 6% above their estimated market value. The worst market for flipping?

The multi-county metro area of San Francisco!

Flipping as a percent of total sales plunged by over one-third year over year to 5.6% of total home sales. As home prices soared to levels that made otherwise rational people giddy and incoherent, flippers ran out of an ingredient in the magic mix, namely being able to buy low. Or perhaps the paint wasn’t right, or the granite in the kitchen was the wrong color, and steep losses suddenly ruined the fun.

Last year in Q2, flippers in the San Francisco metro area still earned an ROI of a breathtaking 45%, on homes that were already high-dollar deals by national averages. But this year in Q2, it became apparent that, instead of buying low, they’d been buying high recently: at an average premium of 34% over estimated market value, according to RealtyTrac. But potential home buyers revolted against these prices. And flippers were forced to sell low, that is they could only sell at a 10% premium. And the average ROI dropped into the negative, to -9%.

Red ink also washed over the Las Vegas/Paradise metro area, a former can’t-lose-money-here flipper’s casino, where flipping in Q2 dropped to 8% of total sales, and the average ROI was -4%.

There were still plenty of markets in Q2 where flipping homes produced excellent returns for flippers who knew what they were doing, where buying low was still possible, and where subsequent home-price increases still played along. But Housing Bubble 2 is displaying more and more aspects of having run its course. And that includes trouble in new single-family homes: dropping sales, swooning prices, and ballooning inventories. Read…  Drowning in Unsold New Homes?

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  8 comments for “Home-Flipping Collapses in San Francisco, Losses Spread

  1. Petunia
    August 30, 2014 at 1:24 pm

    The democrats keep threatening to change the immigration laws and issue visas to millions of “needed” stem workers. With all the good tech jobs threatened and replacement workers making much less who wants to invest in expensive real estate. The income won’t be there to pay off the homes. The mortgage crisis was always about income.

    • Rocky
      August 31, 2014 at 10:03 am

      Sad to say for many Americans the party is over. No job, no future and no hope. Votes have consequences as many as finding out. We have no one to blame except ourselves.

  2. LG
    August 30, 2014 at 6:46 pm

    And so we finally reached the “America for sale” era!

    Hedge accordingly!

  3. johnebgood
    August 31, 2014 at 11:51 am

    Flippers will get burned in this market because it’s rife with fraud and only able to sustain itself with the secrecy and covet means of the derrivative/hedging money scam which fuels everything now. At the core, we have a broken monetary system that is mathematically unsustainable and in fact can’t exist unless there are egnineered bubbles to burst it and the result of the .1% swell makes that clear. Perpetual mounting debt is not sustainable and that’s all our system is based on, debt. There is no real money as of June 5, 1933, HJR 192. What Americans are realizing is that they were sold down river years ago and that there’s a new crowd of suckers to work for and buy the derrivative paper. Nobody is talking about rebuilding America, we’re a controlled demolition project now and nobody is talking about rebuilding America with industry that actually produce things and also built families with real values not vapid disfunctional Justin Bieber Dance with ths starz prozac families.

    ng a NEED for more and more debt to be ‘created’ out of thin air. Wake up people.

  4. R Vespa
    September 1, 2014 at 6:23 am

    Time to nationalize U.S. property back into the hands of American citizens.

  5. Observer
    September 1, 2014 at 10:42 am

    please stop poking it, you’re letting the flies escape!

  6. NotSoSure
    September 1, 2014 at 6:12 pm

    Sure home flipping is busted, but Americans are spending more at the Home Depot. What explains this discrepancy?

    • DavidC
      September 1, 2014 at 9:03 pm

      Personally, I have spent money at Lowes to spruce up and maintain the small house I have (no mortgage) but I have no intention to sell. It’s what responsible homeowners do: continuously maintain and repair and improve. No, I am not buying the latest marble countertops or flashy bathroom appliances. Rather, I am expanding my garden, building a hydroponics system, installing a generator, adding weatherstripping and insulation, and touching up paint and caulking. No frills here, just common sense.

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