Housing Slowdown Unnerves The Fix-and-Flip Crowd (#GotBitcoin?)
Fewer than 46,000 single-family houses and condos were flipped in the third quarter, the smallest number in three-and-a-half years.
The pace of real-estate speculation is slowing, a sign of the darkening outlook in the U.S. housing market.
Small-time investors who flooded into real estate in the past decade to take advantage of low borrowing costs and rising home values are starting to cut back. The moves indicate that the market’s short-term risk-takers see limited upside—and possible turbulence—ahead.
The number of new home loans issued with terms of three years or less, typically used by investors looking to make a quick profit, dropped by 11% in the July-to-September period from a year earlier. It was the smallest amount since the second quarter of 2015, according to Attom Data Solutions, a real-estate data firm.
Higher interest rates have been putting a damper on the U.S. housing market, a key building block of an otherwise solid economy. Housing long provided a boost as the U.S. rebounded from the last real-estate bubble, but in recent months it has threatened to turn to a drag. The average rate for a 30-year fixed-rate mortgage is 4.75%, according to data released Thursday by Freddie Mac , up from below 4% at the start of the year.
The fix-and-flip crowd, numbering some 38,000, has been on the front lines of this shift. In recent months, they have seen a market in which home-price appreciation has slowed but houses remain expensive enough that it is hard to squeeze out a profit. Fewer than 46,000 single-family houses and condos were flipped in the third quarter, the smallest number in three-and-a-half years, according to Attom. That market is expected to make up 5.5% of home sales in 2018.
“The home flippers are a good barometer of where the market is heading,” said Daren Blomquist, senior vice president at Attom. “They are involved in such high and quick turnover of properties that they are hyper aware of market conditions.”
Jean Norton, of Austin, Texas, has invested in dozens of properties since she got into real-estate investing in 2009, typically fixing properties up and then selling them. She keeps a blog about her experience. But she hasn’t invested in a property since doing a deal last year in Mobile, Ala. She said she is holding out for a bigger dip in the market to get back in.
“There’s been a boom for the last couple of years, and we’ve all been waiting for it to slow down,” she said. “I think this is the first year we are seeing some softening.”
A yearslong rush higher in home prices has stalled in recent months, hitting cities like Dallas particularly hard. The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, showed home-price gains slowed for the sixth month in a row in September.
Real-estate speculation has long been a feature of booming housing markets, and its popularity became especially pronounced ahead of the financial crisis. Many got burned as home values sank, leaving them with properties that were worth less than what they paid. While the current decline doesn’t suggest a housing crash akin to the one a decade ago, it looks a bit like the drop-off in 2014 as higher rates made mortgages costlier, Mr. Blomquist said.
In the current cycle, investors have found it profitable to buy properties and quickly fix them up to resell or rent. It has given rise to popular reality television shows as well as communities of small-time investors who exchange strategies on online forums.
“A semiprofessional borrower might have a full-time job and do this part-time,” said Matthew Neisser, chief operating officer at LendingOne LLC, which lends directly to such investors.
Regional and national direct lenders have popped up to provide short-term loans to investors, helping individuals access the cash that a regular mortgage broker typically wouldn’t provide. Some lenders are backed by investment firms such as Blackstone Group LP and Colony Capital Inc. Others access capital to lend out through crowdfunding firms like PeerStreet Inc.
Lenders typically charge a higher annual interest rate than a traditional mortgage and take a slice of the original loan. Some loans are structured to disburse cash for repairs as particular renovation hurdles are met.
Despite the recent market plateau, some investors are finding opportunities in longer-term residential investments, such as fixing up and renting properties to collect the income.
Adam Nye, a real-estate agent in Delmar, N.Y., owns seven properties on the side and is looking to invest in more. He recently bought a house that he rehabilitated and rented out. Then he refinanced with a traditional mortgage, taking the equity value he had accrued to invest in another property.
He has been following a strategy popularized by the real-estate investing website BiggerPockets called BRRRR, short for Buy, Rehab, Rent, Refi, Repeat. He said his property investments have worked out well for him so far.
“They are cash flow positive,” Mr. Nye said of the properties. “It wouldn’t make sense to do them if they weren’t.”
Brian Stike, an assistant principal who lives in Asbury Park, N.J., recently bought an investment property he believed was undervalued. Following the same strategy, he fixed it up himself and with the help of some friends. He is now renting it out to earn income.
“Even if the market crashes, I don’t think there’s any way I could lose money in the long run,” he said. “I think it is very safe.”
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