US fix and flip investors re-inflating another US housing bubble

Finding underpriced homes at a discount, renovating them, then reselling them at full retail value on the open market isn’t a new trend in the US; however, in the years since the last US housing market bubble burst, it’s become almost cliché to say the work, “fix and flip”.

It seems that everyone these days wants to aboard the “home flipping” bandwagon these days in order to try and make a quick buck, and the data makes this fact ever so clear. We’ll dig into the details later, but first, let’s be clear what a “flip” actually entails. A flip is two subsequent non-arm’s length transactions for a home within a 12-month period of time. Some may have different parameters in defining exactly what is and what is not considered a “flip”, but a 12-month holding period is probably a good rule of thumb to go by since most owner occupants don’t buy and sell their residence within 12 months, or even three years for that matter.

RealtryTrac, widely regarded as the “king of housing data”, recently reported that, nationwide, real estate investors that flipped at least one home in 2015 (totaling 110,008 individuals or companies) were breaking 2007 levels, which was the previous peak. This has concerned many economists, because the housing market crash of 2007 was preceded by record home flips only two years prior to the burst of the housing bubble.

RealyTrac reports that the 2015 level of house flips had surpassed the 2005 levels in 11 of the largest metropolitan areas across the US. How can this be? The housing market is strong in 2015, and homes are selling for top dollar in many markets in the US, but the ugly truth is that homes will always sell at a discount to savvy investors by truly motivated homeowners that want a quick sale. Why? Because investors that use creative marketing methods know that it’s the lack of competition created in several different marketing verticals that make discounts a reality.

What’s even more worrisome is that not only has the sheer number of flips hit 2005 level highs, but the average gross profits that investors are generating from a fix and flip is nearing 2005 levels as well. In 2015 these savvy investors managed to average a gross profit of $55,000 per flip, which is shockingly close to the 2005 average gross profit per deal of $58,750.

Many economists are monitoring flip transactions nationwide as well as subsequent resales in order to predict the next housing crisis. It’s been said that it’s the discounted purchases and the subsequent resale above market value that has been the root cause of a market bubble, and if RealtyTrac’s data is accurate, then our next bubble may indeed be inflating again.