Over the last two years, the Federal Reserve raised interest rates, which hurt the U.S. housing market but hit home flippers from small contractors to reality TV stars hard.
Ask Tarek El Moussa, star of HGTV's "The Flipping El Moussas" and former co-host of "Flip or Flop." “How do I calculate interest rates? My ass was kicked last year. Lost a lot of money. The company is like that, added El Moussa. House flipping—investing in and refurbishing a single-family home to sell for a profit—has dropped since the COVID-19 outbreak.
According to property data provider ATTOM Data Solutions, American housing investors dropped 38.85% between 2021 and 2023's fourth quarter. Investor home purchases declined 11% year-over-year in the fourth quarter of 2023, according to Redfin.
Yet, property investors spent $32.3 billion on U.S. properties in 2023, down from $33.6 billion a year earlier, and flippers bought 26% of the lowest-priced homes in the fourth quarter, Redfin reported. In 2021, HGTV's El Moussa acquired 91 houses, and his average monthly mortgage payment was $600,000. He had inventory he couldn't sell after mortgage rates rose and southern California home sales plummeted.
Chen Zhao, Redfin's senior economist, said home flipping thrives in a “buyer's market,” when prices rise and transactions rise. After the Fed raised rates in March 2022 to lower inflation, buyers and sellers froze, stalling the housing market. Investors confront the same problem as homebuyers: limited inventory and sluggish demand after rates reached a two-decade high above 8% in October.
Some rate relief: The average 30-year fixed-rate mortgage was 6.87% Thursday, according to Freddie Mac. However, the current situation is very different from before the pandemic, when sub-4% mortgage rates and high demand might be lucrative. Elisa Covington, a San Francisco Bay Area investor, claimed her 2021 return on investment ranged from 60% to 70%, sometimes 100%.
"In 2021 and early 2022, my projects were getting much higher returns," he stated. "But this year the profit margin for most of my projects have been in line with my expectations" up to 40%. Investors seeking single-family homes would benefit from low homeowner demand, but low availability has hampered buying patterns.
Julio Martinez, Los Angeles JATS Properties co-owner and broker, remarked "2023 was kind of weird." He only bought six residences last year, and several were in foreclosure. Without that, "we probably would’ve only done one or two." Some construction firms claim cooling house investment has reduced new business. Sahara Builders owner Ghulam Mustafa said the pandemic has reduced his firm's full-gut restoration projects, resulting in a 40% earnings drop from 2021 to 2023.
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