Is Recent Home Flipping Activity Warning of a Slowdown in the Market

While most of the country is enjoying an economic boom including housing which may be buoyed by low interest rates an interesting statistic crossed the wires last week: Home flipping in the U.S. has hit its highest rate since 2010*. The 49,000 homes that were flipped in 2019’s first quarter represented 7.2% of the total volume of sales.

Now before the other shoes drops please remember back to 2010, not even a full decade prior. The country was still in the depths of The Great Recession. Terms such as foreclosure, short sale, jingle-mail and so forth were in the daily vernacular of real estate brokers like myself. And many astute fix and flippers saw opportunity i.e. cheap homes, low-interest loans and potential opportunities once the market righted itself.

Ok, the other shoe: Despite the percentage increasing, the actual number of flipped homes fell by 8%, while the number investing in properties to flip declined by 11%. The median sales price of flipped homes was $215,000. With an average profit of $60,000, down $8,000 from a year earlier.

Now there could be many reasons for the down statistics above including lack of inventory, higher costs for materials and labor and so forth.  Yet let’s dive in a little deeper……

*Just over 49,000 single-family homes and condos were flipped in the first quarter of 2019; according to a recent report by real estate data firm Attom Data Solutions.

These homes comprised 7.2% of all home sales nationwide during that time period, representing the highest home-flipping rate since the first quarter of 2010. However do not consider this an indicator that the market is all peaches and cream…..

The number of homes that were flipped was actually down 8% from the previous year to a three-year low. And the number of investors engaging in home flipping has dropped 11% over the past year. Add to this the gross flipping profit was $60,000, down $8,000 from a year earlier to a three-year low. The take-away while home-flipping activity is increasing gross profit and Return on Investment (ROI) is decreasing.

Some brokers who work in this niche of the market are wondering if investors/fix & flippers are watching as their profit margins drop, time on the market increasing i.e. longer time on the market, most costly to hold have decided to sell now with the assumption that demand and thus prices will continue to weaken.

What is interesting as I noted a few weeks ago interest rates are at 18 month lows YET housing activity for which we are in what is historically the most active season is not increasing.

I have three additional comments concerning what I believe will be a soon to be upon us slowing market and one that may actually witness price drops.

First is the cooling of the luxury market across the country. In NYC we have witnessed a glut of luxury condos coming on the market and buyers sitting on their hands. Not only in New York City but also in Miami and throughout the country. Of note the first signs of positive indicators concerning climbing out from The Great Recession was the astute buyers acquiring luxury homes usually for cash that had been severely discounted.

Second is the influx of the iBuyers, the tech firms using algorithms to make instant home offers are proliferating across the country. Zillow in particular, has said it is investing more money into its home-buying and flipping operation, Zillow Offers, which launched last year. Yet here in Denver so far the short-term iBuyers have not been so successful. The following articles from BusinessDen are most insightful:

Third is the proliferation of the reduced fee brokerage signs I am witnessing and new entries into the market i.e. Rex Real Estate and others. The proliferation of signs from Redfin, Trelora and others may suggest strength in the market i.e. go the lower-cost option as the market is strong. I see the opposite i.e. as the market weakens and profit margins retreat sellers may opt for a lower-cost brokerage option to increase their already shrinking margins.

As many readers of my blog know we have been looking for out next home as well. In discussion with our financial planner we have decided to put that on hold for the immediate future as prices seem inflated and shorter-term upside seems limited. Yes we are long-term owners and can take advantage of low interest rates. However historically low-interest rates are indicative of a market needing a growth catalyst, thus personally I believe there are better options for our capital concerning the immediate future.

Of note I am not sure if I will be posting on Monday July 1st, 2019, may actually take a few days of personal time off.

 

Yes the Sky Does Have a Limit

For those old enough to remember The Concorde, the supersonic passenger airplane passengers traveling at 60,000’ were treated to an astonishing site of the blue sky below turning ink black above and viewing the curvature of the earth. So what does this have to do with real estate?

I have always believed the deluxe and luxury real estate market was and is an indicator concerning the future of the overall housing market. I have noticed anecdotally when markets are climbing out of recession the deluxe and luxury real estate shows early activity as it seems astute buyers understand the opportunities these properties offer in an up-cycle market.  I also find the same concerning markets that have crossed the pinnacle and are now on the downside of the curve. In Denver during the past 18 months we have witnessed a slow-down concerning the upper-end of the market including longer days on market and price adjustments: below is an example:

461 Race St:

  • 9/17: Placed on Market $4.85M
  • 6/18 Reduced to $4.65M
  • 8/18: Reduced to $4.1M
  • 4/19: Relisted $3.85M

My concern is a recent statistic concerning Billionaire’s Row in New York City. (Full disclosure I used to reside in a building adjacent to 220 Central Park South one of the buildings included in Billionaire’s Row).  While not actually a row the moniker concerns a section of Midtown West Manhattan bounded by 55thStreet on the south to Central Park South on the north, 5thAvenue on the east and 8ThAvenue on the west. Of note 432 Park is included in Billionaire’s Row as though east of 5thAvenue it does back onto 57thStreet and was also one of the first condo buildings to sell units for over $50M USD.

The construction of 157 West 57thStreet completed in 2014 (a mixed use structure with a Park Hyatt on the lower floors and condominiums above designed by architect Christian de Portzamparc many believe was the catalyst for the moniker and due to savvy marketing reinvigorated a bland congested segment of Midtown Manhattan and turned it into the supposedly most desirable address in the world in a similar league of One Hyde Park, Peak Road, Avenue Foch and other prestige addresses.

Subsequent to 157 West 57thStreet other towers are being constructed. I use towers conservatively as many are taller than the Empire State Building one mile south a defining structure of the Manhattan skyline.  Height sells as many of the buildings promote their unobstructed view of Central Park to the north as a selling point (as the structures tower over the neighboring mostly pre-war apartment and office buildings.

Yet of interest is a report from Miller Samuels a respected appraisal and market guidance firm based in New York. The New York Post nailed it: “Swank apartments are begging for buyers on Manhattan’s “Billionaires’ Row” — with more than 40% sitting unsold in towers that top out at 100 stories.

Concerning 157 West 57thStreet as mentioned prior, only 84 of its 132 pricey condos have been bought — leaving more than a third of them still on the market and none under contract. Six other nearby buildings (as noted above) have as much as 80% of their units available, the figures show, with the total value of all the unsold inventory estimated by one analyst at between $5 billion and $7 billion.

Another building that’s set for completion next year — Central Park Tower, at 217-225 W. 57th St. — will put an additional 179 apartments on the market.

Back to market forecast. As mentioned having been through three market cycles in my real estate career I truly believe the deluxe and luxury market is a forecast for the overall housing market. As one broker in NYC mentioned: “This happened in 1988 to 1992, when there was a glut of condos that didn’t sell. They were smaller and less expensive, but it led to bad times”.

The issue with Billionaire’s row could be timing. Yes a glut of condos all coming on-line with prices starting at $7,000 USD per square foot and some breaking the $10,000 PSF price. The reality is there are only a finite number of prospective buyers in the world at that level of wealth. Coupled with world events i.e. sanctions on Russia, limiting of currency departing China, increasing but below inflation oil prices, South American money heading to Miami, uniform cash thresholds,  reality is the finite market for these units continues to shrink.

Is Billionaire’s Row an anomaly? Of course. The first to the party i.e. Time Warner Center and 432 Park Avenue seem to have done OK. Those joining the party subsequently and potentially in haste should be concerned.  As developers, their success is their sales. However with leveraged capital and banks/financial institutions providing working capital exposure the risk is spread. However at some point mortgages need to be paid, asking prices may have to be slashed and as I have shown in past blogs re-sales have incurred losses.

Am I concerned about the developers and the banks? On a micro level, no. I am concerned about the fallout from massive defaults to empty buildings to job losses as when such real estate does not sell the multiplier effect does impact down the food chain.

During the Internet bust of the early 2000’s Alan Greenspan warned of irrational exuberance.  Prior to The Great Recession that begins in 2008, real estate on all levels was suddenly considered a commodity. Is the lack of sales activity on Billionaire’s Row a harbinger of the overall real estate market? When the deluxe and luxury market sneezes there is a good chance the overall market will eventually catch a cold.