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FLIP THEN FLOP? Banks Fund Eerily Familiar House Flipping Boom

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By Dmitry Kalinovsky @ Shutterstock.com

Big banks and investors are putting a lot of money into a house flipping boom that is eerily familiar to anyone who survived the carnage of the financial crisis. Ryan Dezember reports in The Wall Street Journal:

Wall Street has made a mountain of money available to house flippers, and selling move-in-ready rehabs has rarely been easier. The challenge is finding beat-up and out-of-date properties that can be renovated and resold for a profit.

“Investors like me, we’re like ants on a sugar hill all fighting for the same projects,” said Ed Stock, who started fixing and flipping houses on New York’s Long Island after the 2008 mortgage meltdown. “It’s the greatest time to be in this market; it’s just hard to find the inventory.”

Foreclosure moratoriums have shut off a big source of fixer-uppers since last spring’s lockdown. Meanwhile, competition is stiff from regular home buyers armed with superlow mortgage rates and inspired by cable-TV renovators. Rising costs and limited availability of labor and building materials, such as lumber, cut into profits and stretch out jobs.

Just 2.7% of home sales were flips—sales within a year of a prior sale—during the first quarter, according to property data firm Attom. That is the lowest portion of sales since at least 2000, when Attom started counting flips. The number of flipped houses and condos were the fewest in a quarter since 2003.

That was two housing booms back and long before measured-in-months loans to house flippers became some of the hottest properties on Wall Street. Mortgage trusts, pensions, hedge funds, private-equity firms, investment banks and insurance companies all want so-called flip loans, drawn by yields in the range of 8% to 12% at a time when one-year Treasurys pay less than 0.1%.

Mr. Stock’s lender, Roc360, last week received a $2 billion infusion from insurer Athene Holding Ltd. to make more loans to house flippers as well as landlords, who buy a lot of rehabbed houses. Arvind Raghunathan, Roc360’s chief executive, said his firm would have little trouble raising several billion more given the hunt for yield that has sent investors into less-familiar pockets of fixed income.

Action Line: Big money, rushing into a small market, creates at least the potential for a bubble to emerge. Be careful. Many times, you invest, and they win.

 

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com