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The State of House Flipping in 2016 – Part I

At the National Level, Flipping Activity is the Second Lowest Since 2012

Bin He    |    Housing Trends

Flipping is the term used when an investor purchases a property, renovates and repairs it, and then re-sells it within a short period of time for a profit. In a blog series I published a while back, Is Flipping Coming Back? Part I and Part II, I concluded that in Q1 2016 flipping activity was well below its historical high at the national level although there were geographic variations at the metro level. Now that 2016 is behind us, it’s time to revisit this topic to see how things have changed. A little different from the analysis I did before, a flipped property is now defined as a property that is bought and sold within 12 months rather than nine months since we have observed it takes a longer time to flip a property. Furthermore, non-disclosure states are now included in the analysis. We aren’t able to know its price-related metrics but it is feasible to derive the share of flipped properties to sales. In Part I of this series we will focus on the national-level analysis, and in Part II we will zoom in on metro areas.

Flipping House

Flipping House

At the national level, the ratio of flips to sales stands at 4.9 percent in 2016, which is well below the peak value of 7.5 percent reached in 2005, as shown in Figure 1. As a matter of fact, this is the second lowest rate of flipping activity since 2012, as the lowest since 2012 occurred in 2015 with a flipping percentage of 4.8. It appears that flipping activity has slowed in the past two years since the start of the housing recovery, thanks to a five-year high in the rate of home-price appreciation and still-tight for-sale inventory.

Flipping

Flipping

In 2016, the real median gross gain (in 2016 dollars) rose to $54,700 per property flipped, which is approaching the historical high of $56,411 (in 2016 dollars) seen in 2005 prior to the housing crash, as Figure 2 shows1. On the other hand, the median percentage gross gain has declined since it peaked in 2013. We continue to believe the decline of the percentage gain might have something to do with the decline of the share of distressed sales, which leads to high acquisition cost. From this CoreLogic Insights blog posted by Molly Boesel, Cash and Distressed Sales Update: November 2016, we see that the share of distressed sales has declined significantly and was just 7.7 percent in October 2016. From Figure 2 we can also see that the median percentage gross profit was about 20 percent between 1996 and 2008 and then increased to above 30-40 percent after 2008, which is largely due to the high acquisition cost on the investors’ part from 2000 to 2008, as Figure 3 shows.



1 Gross profits are in real terms of 2016 dollars so that we can eliminate the impact of inflation over time. CPI is used to derive the real dollar amount.

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