Housing flipping is back in Florida and Las Vegas

REUTERS/Ilya Naymushin

Nationally, there has been little change in house flipping in the past year, but Las Vegas is approaching historical highs, and flipping is making a comeback in several Florida markets.

House flipping is a practice that some believe is an indicator of an over-heated housing market. Nationally, it made up a stable of all home sales during the past year, mirroring a steady increase in home prices.

The good news: that flip rate is roughly in line with the non-housing bubble years and well below the 8.6% flip rate of all home sales in 2006. The concern: there are some hot spots. While stable nationally, we’re having déjà vu: flipping is making a comeback in places such as Las Vegas and Miami, which saw high levels of flipping activity during the previous boom.

Moreover, there’s evidence that house flippers may be sitting out in some markets. That’s because rapid price growth in some expensive markets may be making that initial buy too costly for house flippers.

House flipping is a unique housing market metric for two reasons. First, it is a speculative undertaking where investors are betting on turning a profit, and has historically occurred at high rates just before a market peaks. Second, flipping usually entails removing a home from a particular price point in the market and moving it to a higher price point through improvement. That movement creates competition for homebuyers who may be looking to build sweat-equity on their own. But flipping activity also provides improvements to the housing stock for buyers who don’t have time or cash to improve a home themselves.

Flipping reached a peak in 2006, but is it actually on the rise again? We set out to answer that question by looking at all the home sales in the last year from, and found that:

• Nationally, flipping activity has held steady over the past year at around 5% of all home sales, and is down from the peak of 8.6% in the first quarter of 2006;

• Flipping is highest is Las Vegas, where 10.4% of home sales are flips, and is about 80% of its 15-year peak. Flipping is lowest in Detroit at just 1.1%;
  
  
• Over the past year, flipping activity has increased most in Miami, growing from 4.7% to 6.4% of all home sales. Other Florida markets have also seen relatively large increases.

REUTERS/Ilya Naymushin

Flipping Most Common in Las Vegas, Least Common in Detroit
Though flipping has remained relatively stable nationally, flipping activity varies significantly across individual markets. Las Vegas, Nev. leads the pack with 10.4% flips, followed by Fresno, Calif. and Daytona Beach, Fla., with 7.6% and 7.3%, respectively. Detroit and Louisville, Ky., have the lowest share of flips at less than 2.5%.

In addition, three of the top flipping markets are within at least 70% of their 15-year peak. For example, Las Vegas is now 79% of its peak flipping point of 13%, which occurred back in the second quarter of 2005. Baltimore is at 75% of it’s peak flipping point of 9% of home sales in the fourth quarter of 2006, and Richmond, Va., is at 70% of peak flipping, which occurred in the second quarter of 2006.

REUTERS/Ilya Naymushin

We’ve also found an interesting exception between prices and flipping. While there is a strong correlation between price changes and flipping activity over the past year, the relationship doesn’t necessarily hold for those with the smallest change in flipping activity. When grouping our markets by flipping rates, not only do fast-flip markets have the largest average price increase, but the low-flip markets also had large price increases. In other words, places with the biggest increase and biggest decrease in flipping activity over the past year experienced higher than normal price gains.

REUTERS/Ilya Naymushin

Why is this? Flipping requires three things: (1) a market where home prices are appreciating, (2) a cheap supply of homes to buy and flip, and (3) ready buyers to purchase the flip.

Flipping a house in appreciating, but expensive markets may be more difficult because:

• Homes suitable to purchase for a flip may be more costly and have higher carrying costs, such as taxes and insurance.
  
  
• The completed flip may take longer to sell because it could end up in a high price tier. Several of the top places with the largest decrease in flipping activity fall into this group, including Los Angeles, San Diego, and Denver.

In conclusion, the U.S. housing market isn’t flipping out just yet, but there are signs that some areas are approaching their previous flipping points. While this isn’t of concern in places where flipping activity is low relative to the national average, such as Birmingham there are signs that markets such as Las Vegas may soon reach an historical high level of flipping.

To read the full report and methodology, click here.

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