Home Flipping Near Cycle Highs, But Flippers Increasingly Adding Value

Economic Observations: April 2019

By Ralph McLaughlin Housing Affordability, Real Estate

Home flipping activity[i] – which is the act of buying a property with the intent to sell in a short period of time for a profit - has increased steadily over the last eight years.  By the fourth quarter of 2018, the flipping rate in the U.S. reached 10.6 percent of all home sales. While this is down from the cycle-high of 11.1 percent earlier that year, home flipping is seasonal. Accounting for this seasonality, the flipping rate in the fourth quarter of 2018 was the highest rate for a fourth quarter since we started tracking home flipping back in 2002. 

Flipping Rates and Characteristics

At the same that we’re seeing flipping rates hover near historic highs, we also find that flippers are making healthy returns[ii] on their projects. Nationally, the median annualized return on flipping was flat year-over-year to just over 40 percent in the fourth quarter of 2018.

Flipping Returns

We also find that flippers today are likely using a different business model than they were in the past. How do we know this? By combining CoreLogic’s public records data with our robust statistical models, we can estimate the discount that a flipper received on a property when they purchased it, and the premium they received when they sold it. Along with market appreciation, these are the three sources of returns that flippers can make on a home.

Flipping Returns

As you can see in these charts, back in the early 2000s the average flipper didn’t make much from either buying at a discount or selling at a premium, suggesting that flippers were relying more on speculation and rising prices than anything else to make a return. However, since the Great Recession, flippers have been increasingly good at acquiring properties at a discount, either because the properties were legally, financially or physically distressed. This suggests that flippers have shifted from speculating in the housing market to adding value, making flipping investments more sustainable in the long run.

[i] Flipping is defined as the purchase of a property with the intent to sell within a two-year period for profit. We use the 24-month definition as that is the Internal Revenue Service’s threshold for when real estate holdings could be considered owner-occupied and thus eligible for capital gains exemptions. We also diverge from previous CoreLogic work on flipping that uses a 12-month definition. We do so because 12-month flips only capture flips that are subject to short-term capital gains tax, whereas properties flipped but held for 12-24 months are considered investments but subject to long-term capital gains tax. Since long-term capital gains tax rates tend to be lower than short-term capital gains tax rates, using the 24-month definition thus allows for a much broader analysis of investment in, and returns to, home flipping activity since some flippers may choose to hold properties longer than 12 months so that they may pay the lower long-term capital gains tax rate.

[ii] We measure returns as the annualized economic returns to flipping, which considers the opportunity costs of a flip (price growth of similar houses that weren’t part of a flip), any market discount the flipper received on the purchase of the property, and any premium the flipper received on the sale of the property. Because we do not observe the capital expenditures that an individual flipper deployed to undertake any renovations or repairs, our estimates of returns represent the upper bound of a return.

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