Home Flipping Increases While Profit Margins Continue to Drop
Typical Profit Margins Slump to 10-year Low
ATTOM, curator of the nation’s premier property database, released its second-quarter 2021 U.S. Home Flipping Report showing that 79,733 single-family homes and condominiums in the United States were flipped in the second quarter. Those transactions represented 4.9 percent of all home sales in the second quarter of 2021, or one in 20 transactions – the first increase in more than a year.
The second quarter home flipping rate was up from 3.5 percent, or one in every 29 home sales in the nation, during the first quarter of 2021. But it was still down from 6.8 percent, or one in 15 sales, in the second quarter of last year and remained below levels seen throughout most of the past decade.
The report further shows that as the flipping rate rose, profit margins dipped to a 10-year low. The gross profit on the typical home flip nationwide (the difference between the median sales price and the median paid by investors) rose in the second quarter of 2021 to $67,000. That figure was up 2.4 percent from $65,400 in the first quarter of 2021, and 3.1 percent from $65,000 in the second quarter of last year.
But the more important measure of profit margins slid downward, with the typical gross-flipping profit of $67,000 in the second quarter of 2021 translating into just a 33.5 percent return on investment compared to the original acquisition price. The national gross-flipping ROI was down from 37.2 percent in the first quarter of 2021, and from 40.6 percent a year earlier, to its lowest point since the first quarter of 2011, when the housing market had yet to start recovering from a price slump brought on by the Great Recession in the late 2000s.
The decrease of 7.1 percentage points in the typical profit margins from the second quarter of last year to the same period this year, marked the largest annual drop since mid-2014. Profit margins declined in the second quarter as prices on flipped homes rose more slowly than they did when investors originally bought their properties.
Specifically, the median price of homes flipped in the second quarter of 2021 soared to an all-time high of $267,000. That was up 10.6 percent from $241,400 in the first quarter of 2021 and 18.7 percent from $225,000 a year earlier. The annual increase marked the biggest price spike for flipped properties since 2005, and the quarterly gain topped all improvements since at least 2000.
But those price run-ups still failed to surpass increases that investors were absorbing – 13.6 percent quarterly and 25 percent annually – when they bought the homes that they sold in the second quarter of this year. That gap – prices rising more on purchase than resale – led to profit margins dropping.
The price surges on both sides of flipping deals came amid an ongoing housing-market boom that continued during the second quarter of 2021 despite widespread financial damage done to the broader U.S. economy by the Coronavirus pandemic that hit early in 2020. Home prices continued surging amid a glut of buyers chasing an already-tight supply of homes stifled further by the pandemic. Those buyers were drawn into the market in large part by 30-year home-mortgage rates that dipped below 3 percent and a desire among many households to escape virus-prone areas and opt for space to accommodate work-at-home lifestyles.
“Home flipping rebounded during the second quarter. But profits sure didn’t, as the typical home flip around the country netted the smallest return on investment in a decade,” said Todd Teta, chief product officer at ATTOM. “However, it’s not like home flipping has become a losing proposition. A 33 percent profit on a short-term investment remained decent, even after renovation and holding expenses. But with a few more periods like the second quarter of this year, investors may need to reframe how they look at these deals.”
