US home flipping malaise pinches reality TV stars to contractors

Redfin

23/03/2024 11:00

By Amina Niasse
       NEW YORK, March 23 (Reuters) - While the increase in
interest rates engineered by the Federal Reserve over the last
two years put a damper on the overall U.S. housing market, it
took a sledge hammer to home flippers from small contractors to
reality TV stars.
    Just ask Tarek El Moussa, star of HGTV’s "The Flipping El
Moussas" and former co-host of the real estate and renovation 
focused channel's mainstay, "Flip or Flop." 
    “How do I account for [interest rates]? I got my ass kicked
last year. I lost a lot of money. And that's just the reality of
the business,” said El Moussa.
    Indeed, house flipping - or investing in, and often
renovating, a single-family home with the intent to sell for a
profit - has fallen from heights seen during the COVID-19
pandemic. The number of Americans acting as investors in the
housing market dived 38.85% between 2021 and 2023’s fourth
quarter, according to property data provider ATTOM Data
Solutions. Through the fourth quarter of 2023, the share of
homes purchased by investors fell 11% on a year-over-year basis,
a report from real estate and mortgage firm Redfin said. 
        Even so, housing investors spent $32.3 billion on homes
in the U.S. in 2023, compared with $33.6 billion a year earlier,
and flippers bought 26% of the lowest-priced homes during 2023's
fourth quarter, Redfin said.
        
  
        FRENETIC MARKET 
    HGTV's El Moussa bought 91 homes in 2021 - garnering him a
$600,000 average monthly mortgage payment. Then mortgage rates
surged, home sales in southern California plunged, and he found
himself with inventory he could not offload.
    Home flipping does best in a frenetic “buyer’s market,” with
prices rising amid increased transactions, said Chen Zhao,
Redfin’s senior economist. After the Fed began hiking rates in
March 2022 to lower inflation, buyers and sellers held off,
creating gridlock in the housing market. 
    Rates eventually reached a two-decade high near 8% in
October, and the resulting market has presented investors with
the same issue home-buyers face – limited inventory and lukewarm
demand. 
    Rates have eased somewhat: Freddie Mac said on Thursday the
average 30-year fixed-rate mortgage was 6.87%. Still, the
current scene is a striking departure from the onset of the
pandemic when sub-4% mortgage rates and heightened demand could
promise a juicy profit.
        
    LOWER MARGINS, LABOR TROUBLES
    For Elisa Covington, an investor based in the San Francisco
Bay Area, a return on investment during 2021 often swung between
60% and 70%, she said, occasionally hitting 100%. 
    "In 2021 and early 2022, my projects were getting much
higher returns," Covington said. "But this year the profit
margin for most of my projects have been in line with my
expectations" of 30% to 40%.
        Lack of homebuyer demand would make it easier on
investors looking for single family homes, but reduced inventory
has largely outweighed that, cutting into acquisition trends.
    Julio Martinez, co-owner and broker at JATS Properties in
Los Angeles, said "2023 was kind of weird." He acquired just six
homes last year and even that was due to several of the
properties being in foreclosure. If not for that, "we probably
would’ve only done one or two."
    Some construction companies say cooling home investment has
cut into new business activity. Ghulam Mustafa, owner of
New-York based Sahara Builders, said the decline in his firm's
full-gut renovation projects since the pandemic has caused a 40%
decline in profit since 2021 through the end of 2023.
    Last year “was much slower than the pandemic,” Mustafa said.
    For contractors who don't build new homes, steady project
supply in the absence of gut-renovations is replaced by
smaller-ticket refurbishing projects for existing home-owners,
RedFin's Zhao said.
    For house flippers, meanwhile, lower profits have reduced
the labor they can hire for renovations, which can decelerate
sales. 
        JATS Properties' Martinez had to let go of a full-time
handyman, he said. In addition to property flipping, his
family-owned company operates as brokers and property managers,
so that labor loss meant less attention to home-flip projects.
    "We had to slow  workers  down on our projects, and lend
them out to our clients," said Martinez. "Typically we take
first priority because they're our employees. But when we don't
have the funds to cover our own projects, we have them work on
our clients' homes. It's taking the burden of expense of those
employees off our backs."
    
    FADING STARS
    Amid the slow turnover, flippers are diversifying their
activities.
    Martinez, who saw transaction volume in 2023 fall by half
from 2021, began making property-secured loans to aspiring
investors. And El Moussa, who needed to gird for losses he knew
were coming from unsold flipper projects, shifted to buying home
purchase contracts wholesale and selling to investors, deals
that typically net smaller margins but are less risky than
traditional flipping.
        "In order to get prepared for those losses that were
coming, I stopped buying houses to flip and I only focused on
wholesaling," he said.
    The story has changed for the house flipper reality TV
landscape as well.
        HGTV ad revenue slid from a four-year high of $42.7
million in 2021 to $32.6 million in 2023, according to data from
iSpot.TV, a television ad measurement company, though it
continues to hold dominant share in its market segment.
    Shows like The El Moussas have increasingly incorporated
discussions on rates, slow turnover, and price acceleration in
Southern California to keep viewers engaged, said Loren Ruch,
head of home content at HGTV. Show development focus has turned
to standalone secondary homes, for example a guest house, and
multi-generational living.
    "People might not be spending huge amounts of money on
design or renovation projects, so we're also looking into a
variety of shows that are more approachable price points that
are maybe based on not doing as much demolition, but actually
focusing on the space and the configuration," said Ruch.

 (Reporting by Amina Niasse;
Editing by Dan Burns and Anna Driver)
 ((amina.niasse@thomsonreuters.com;))