House Flipping Industry Today

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One of the questions we always hear is “what is going to happen when the industry slows?” I think that this viewpoint has a lot to do with the Great Recession. Real estate dropped and spiked so aggressively after the subprime mortgage crisis in 2008. I fully appreciate that real estate is a cyclical industry but I feel there are some significant demographic trends that affect fixing and flipping.

Interest rates are a reflection of inflation and so it is reasonable to expect interest rates will stay in the historical low end of the range for the foreseeable future.

The Past

A traditional fix and flip is defined as a property that is purchased and sold within a calendar year. Based on this definition, the peak of the number of fix and flips occurred in the second quarter of 2016. The previous peak was in 2007 when banks and mortgage lenders were unloading distressed properties as fast as they could. As has been widely publicized, banks and lenders are carrying very few distressed properties on their balance sheets today. So if fixing and flipping peaked in the second quarter of 2016 when there was very little distressed inventory, what was the source of properties?

The Present

The population of the United States is aging rapidly. It is estimated that the majority of the 55+ set have lived in their homes for 25 years or more. This group of people, whether they be baby boomers or the generation before, are looking to downsize. This could mean moving to a smaller home with a smaller or nonexistent yard. It could also mean wanting to move closer to kids or grandkids and in many cases moving in with their children. There are also many great lifestyle communities for the 55+ set, in addition to assisted living.

Another strong trend is that the millennials are starting to become home buyers. Millenials got crushed in the great recession and many graduated with student debt. They then entered a labor market that was contracting and it was tough to find a well-paying job. With the economic expansion over the last eight years, many millennial personal balance sheets are being repaired. They are now looking to home ownership for the first time. There are many down payment assistance programs to help this transition, as well as gifts from parents to help their children get started with what was probably the best investment they ever made in their lifetimes.

What’s to Come

Meanwhile, interest rates and inflation are at historically low levels. The world is awash in almost everything as we have moved towards a global economy. Food, energy, commodities and industrial materials are all at record high inventories and this means inflation will remain low. Interest rates are a reflection of inflation and so it is reasonable to expect interest rates will stay in the historical low end of the range for the foreseeable future.

What this means to us is that as long as the US population continues to get older (unfortunately, I think that’s the case), millennials continue to pursue home ownership and mortgage rates stay at the historical low end of the range, we have a positive outlook. These three trends are all long term and while real estate will continue to have cyclical peaks and valleys, the long-term underpinnings are firmly in place for another fifteen to twenty years or more.

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