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Flipping Properties Can Improve Housing Affordability—Here’s How
The Housing Affordability Crisis
Housing prices have surged 47% since 2020, outpacing the previous three decades of growth, according to the Case-Schiller National Home Price Index. A severe supply shortage is a major driver of the affordability crisis, particularly impacting first-time homebuyers. Today, only 17% of renters can afford to purchase a median-priced starter home, a sharp decline from 42% in 2019, as reported by the National Association of Realtors.
Some critics argue that real estate investors exacerbate this shortage, especially since they purchased nearly a quarter of low-priced homes in Q3 2024. Policymakers have responded with regulatory proposals, such as a federal ban on hedge fund purchases of single-family homes and a 65% tax on house flipping gains in New York. However, analysis by Freddie Mac suggests investor demand is not the primary cause of rising home prices. In fact, some house flippers argue that their investments help add much-needed affordable housing supply.
The Role of Investment in Distressed Properties
New construction alone will not resolve the estimated 7-million-unit shortfall in affordable housing. Regulatory barriers like strict zoning laws make it difficult to scale new builds. Instead, revitalizing distressed homes could significantly contribute to affordability.
According to the American Community Survey, the median owner-occupied home in the U.S. is 40 years old, with 12% of homes built before 1940. The Harvard Joint Center for Housing Studies estimates that 9.5 million homes suffer from severe structural deficiencies or lack essential utilities like plumbing and electricity. The Federal Reserve Bank of Philadelphia reports that necessary repairs to low-income homes alone would cost $57 billion.
Despite substantial government investment in infrastructure projects, little attention is paid to upgrading housing. House flippers have the expertise and financial incentive to restore unlivable homes into move-in-ready properties for first-time buyers. Unlike luxury developers, flippers focus on selling at competitive prices rather than inflating values with high-end upgrades.
The Dual Impact of House Flipping on Affordability
In some markets, house flippers have increased the supply of starter homes, yet their pricing still exceeds what many buyers can afford. Jerry O’Reilly, a real estate investor in Ohio, notes that while more entry-level homes are available, the income needed to purchase them remains prohibitive.
Concerns about gentrification are also prevalent. Research from the Pratt Center for Community Development suggests that flippers often target low-income communities, potentially raising eviction rates and displacing residents. However, it’s difficult to determine whether investors cause gentrification or simply capitalize on existing trends of neighborhood revitalization.
Another factor influencing affordability is changing buyer expectations. Wealth manager Ben Carlson suggests that popular house-flipping television shows have set unrealistic standards for first-time homebuyers, increasing demand for turnkey homes that flippers provide. As a result, fewer buyers are willing to take on fixer-uppers themselves, further driving up demand for flipped properties.
Is House Flipping Still Profitable?
With rising costs, flipping is becoming less lucrative. According to ATTOM Data Solutions, gross profit margins on flips have dropped from 48.8% in 2020 to 28.7% in Q3 2024. In high-cost cities like Austin, Houston, and San Antonio, returns have fallen significantly.
Many investors are shifting strategies to avoid high capital gains taxes. O’Reilly now holds properties for two years before selling, allowing for tax advantages. Meanwhile, cash-only purchases have become the norm, with ATTOM reporting that nearly two-thirds of flips in 2024 were cash transactions due to high-interest rates.
Despite declining returns, flipping remains profitable in markets with high demand and lower costs, such as Pittsburgh and Cleveland. Financing options exist for those without cash reserves. Doug Perry, a financing expert at Real Estate Bees, advises investors to seek loans covering both acquisition and rehab costs. These loans typically have short terms (12 months) and require strong planning to ensure project success.
Policy Changes to Encourage Affordable Housing Flips
Joshua Ernst of MarketWatch suggests several policy initiatives to incentivize investors to improve housing affordability:
- Tax Incentives: Classify profits from flips in designated opportunity zones as capital gains to reduce tax burdens.
- Government-Backed Loan Programs: Allow Fannie Mae and Freddie Mac to support loans for flipping distressed properties.
- SBA Loan Programs: Introduce small business loans tailored for house flippers focusing on affordable housing.
Some cities have already implemented tax abatements for redevelopment projects. Akron, Ohio, for instance, offers a 15-year property tax moratorium on structural improvements and new builds, leading to a surge in affordable home renovations.
Finding Profitable and Impactful Flips
Investors looking to contribute to affordable housing should focus on strategic locations. O’Reilly suggests identifying transitional neighborhoods with:
- Well-maintained adjacent properties.
- Proximity to quality retail and public transit.
- Strong economic growth indicators, such as rising median incomes and declining unemployment.
Successful flipping requires careful planning. Perry warns that investors who over-renovate or fail to control costs risk financial losses. Thorough market research, conservative budgeting, and reliable contractor partnerships are essential to a successful and profitable flip.
Conclusion
While house flipping alone cannot resolve the housing affordability crisis, it can play a vital role in increasing the supply of move-in-ready starter homes. Strategic policy initiatives, financing options, and careful market selection can help investors contribute to solving the affordability problem while maintaining profitability.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Flipping Properties Can Improve Housing Affordability—Here’s How
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“