This time it’s different
A few notable ways are:
- Flips artificially skew-higher the popular house price indices, such as Case-Shiller. For example, using data from this report, if flips make up 6% of all purchases, at a 50% gross profit, it will add 3% onto the Case Shiller headline number, even if the remaining 94% of house sales prices were flat.
- Flips artificially boost organic demand metrics in the popular, high-frequency Existing Home Sales and Pending Sales reports, because the same house is counted twice within a year period, before it lands in the hands of the final end-user, or investor.
- Flips, used as comparable sales in residential appraisal reports, artificially boost the perceived “value” of similar, perhaps non-renovated houses, leading to buyers over-paying, and lenders over-lending. This is particularly dangerous when a down-cycle comes, especially in this era of little to no money down, as the “froth” will come off first, leading to a quicker and larger wave of negative equity.
- Flipping removes much needed lower-price-band supply and magically turns it into higher-price-band supply, exacerbating the “distribution” problem in America being mistaken for a “lack of supply”.
- Flips, fully renovated, hurt demand for newly built homes by America’s home builders, which accounts for the continuous low-level of “New Home Sales” relative to previous cycles going back decades.
- Flipping makes real estate, ancillary, mortgage, and retail numbers appear better than macro organic, economic conditions would support. In other words, if an end-user buys a house, they may “update it”. If a flipper buy it, they may gut it and completely “redo” it. In fact, Home Depot and Lowe’s stock performance is mirrored in the “Home Flipping Profit Trends” chart below.