Mark Hanson Advisers on Flipping

This time it’s different

A few notable ways are:

  1. 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.
  2. 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.
  3. 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.
  4. 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”.
  5. 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.
  6. 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.



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