From April through June, flips represented 8% of all sales, down from the 9.9% share seen in Q1 2023 and down from the 8.9% share in Q2 2022. While this was still a high rate, historically speaking, the decline is a trend to watch. Notably, the average time from investor purchase to resale for a home flip increased to 178 days in the second quarter, marking the longest period since mid-2020.

Despite the longer time to resale, raw profits and returns on investment (ROI) increased for a second quarter in a row, marking signs of recovery from a slump over the prior two years. ROI climbed by nearly 5 percentage points between the first and second quarters, the fastest pace since 2020, while raw profits jumped by 18% in the same time frame, a quarterly spike not seen in the past 10 years.

These improvements mirrored the housing market at large. The single- family median home price rose by 10% during the spring buying season, following steady declines from mid-2022 through early 2023.

In fact, the gross profit on the typical home flip (the difference between the median purchase price paid by an investor and the median resale price) rose to $66,500 in Q2 2023, up from $56,250 in the prior quarter. This was a significant year-over-year decline of 35%, however, as the gross profit on a typical transaction in Q2 2022 was $102,063.

The typical gross profit for a flip in the second quarter represented a 27.5% ROI compared to the original purchase price. This marked a turnaround from the 22.9% ROI posted in Q1 2023 and the recent low point of 22.3% in Q4 2022. It was still far below the peak ROI of 61% in Q2 2021, but fix-and-flip profits are seeing a clear and steady uptick.

The typical resale price for a flipped home rose by 2.1% between the first and second quarters to reach $308,500. This contrasted with a 1.6% decline in the median purchase price for the investor during the same period. And it was a reversal of the trend in which prices and profits for fix-and-flip projects ran counter to the U.S. retail housing market, which has seen an extended boom for the past decade.

Although the rate of home flips dropped in the second quarter, real estate often remains a local endeavor, and investors should make note of the places where flips are thriving. Attom analyzed metro areas with a population of 200,000 or more that had at least 50 home flips in Q2 2023. The top-five metros included Macon, Georgia (where flips accounted for 16.8% of all home sales); Columbus, Georgia (15.3%); Spartanburg, South Carolina (13.5%); Atlanta (13.5%); and Akron, Ohio (12.5%). Among metro areas with a population of 1 million or more, the highest shares of flips were recorded in Atlanta, Memphis, Jacksonville, Cincinnati and Phoenix.

In addition, some metros are providing bigger returns on investment for these projects. In Q2 2023, these locations included Akron, Ohio (116.7% ROI); Pittsburgh (112.9%); Scranton, Pennsylvania (93.7%); Hagerstown, Maryland (86.6%); and Trenton, New Jersey (85%). In metro areas with populations of at least 1 million, the highest ROIs were found in Pittsburgh; Baltimore; Philadelphia; Rochester, New York; and Richmond, Virginia.

Although there are many positive signs for the fix-and-flip market, uncertainties remain. The increases in gross profits and margins are heartening, despite the decline in the flip rate. But it remains to be seen whether these pricing improvements are a reflection of the yearly bumps seen during the busy spring purchase season or are representative of a more lasting measurement for profits on a home flip project. ●

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An affordable program typically has household income requirements based on the median income for the property address, which vary by program. For example, a program may allow for up to 80% of the annual median income for an area, or a maximum income of $80,000 in a neighborhood where the median income is $100,000.

“Despite recent market volatility and other pressing concerns among mortgage professionals, there is increased awareness about the need for affordable housing.”

While it is recommended that households spend no more than 30% of their income on monthly rent or mortgage payments, this target can be challenging for lower-income borrowers. One in every three households is burdened with limited disposable income to spend beyond basic needs, with many resorting to credit cards to stay afloat.

The current economic environment is plagued by rising interest rates, rapidly increasing home prices and inflationary pressures that are making it more difficult for low-income residents to afford housing. This combination of factors has served as the perfect storm to damage affordability metrics. In fact, the monthly mortgage payment as a share of median income has risen to 33.8%, according to the Urban Institute, even higher than the peak of 30.9% before the 2007 market crash. Mortgage originators should understand the challenges facing the affordable housing sector and the efforts to rectify these problems.

Challenges mount

This past July, benchmark interest rates reached their highest level in 22 years, contributing to the rapid rise in mortgage rates. As a result, some borrowers have turned to adjustable-rate mortgages, or ARMs, for affordability. In the first five months of 2022, for example, CoreLogic reported that homes purchased with ARMs increased by 75% compared to the same period a year earlier.

At the same time, active home listings are down across the board and there is far less supply in the lower price ranges. Homeowners are staying put instead of trading up so they can avoid having to take on a higher-priced mortgage. Entry-level construction is only a fraction of what it was in the 1970s and there are only 33 affordable homes available for every 100 needed, according to the National Low Income Housing Coalition.

There continues to be a stall in the construction of single-family homes, which remains below the pre-pandemic pace. And while construction of affordable housing has declined, demand has increased as the number of low- to moderate-income households has grown.

On the upside, there are close to half a million multifamily homes in the production pipeline, representing one of the highest numbers since the 1980s. Additionally, there was a 37% increase in multifamily originations (involving properties with five or more units) between the first and second quarters of this year.

This is important for affordable housing as these multifamily units provide additional options for renters. In a tough market, additional multifamily options provide some good news for households locked out of homeownership. In the background of this difficult landscape for affordable housing, there is action being taken on many levels of the public and private sectors. The federal government plays a key role in the affordable housing ecosystem through a variety of agencies and programs.

Answers pledged

The White House has introduced budgetary plans and Congress is attempting to pass affordable housing bills. The U.S. Department of Housing and Urban Development, the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture play key support roles for housing assistance as their primary audiences are first-time homebuyers and low- to moderate-income borrowers.

The Biden administration has allocated $10 billion in its current budget for planning and capital grants, which are designed to reduce barriers for affordable housing projects and implement new tax credits. It has also introduced a Housing Supply Action Plan to advance administrative and legislative priorities. Many affordable housing bills are being introduced at the congressional level.

The government-sponsored enterprises, Fannie Mae and Freddie Mac, have set quotas to purchase certain amounts of their business from low- and moderate-income borrowers. More than half of loans to first-time homebuyers are purchased by the GSEs, so they are key players as they return capital to lenders and positively impact interest rates.

Additionally, state and local housing programs provide capital to push forward affordable housing initiatives. Some jurisdictions are teaming up to realize gains.

One example is a joint affordable housing plan developed by eight jurisdictions in Washington, D.C., Maryland and Virginia, with the goal to provide affordable housing and support services to low- and moderate-income residents. Local housing authorities and state housing finance agencies are doing key work to support tangible gains for communities.

In addition to action by federal, state and local governments, there are many efforts being undertaken by private enterprises. There are hundreds of nonprofits nationwide that support the affordable housing market through development, management and financing, as well as engagement in the latest education, training, networking and advocacy opportunities. Beyond nonprofits, there are many banks and lending institutions that have affordable housing wings. These private institutions pledge considerable time and resources to help the creation of affordable housing.

● ● ●

The rise of interest rates, rapid increases in home prices and a lack of adequate housing supply creates challenges for low- and moderate-income households to afford homeownership, even as the need for affordable housing grows. Despite recent market volatility and other pressing concerns among mortgage professionals, there is increased awareness about the need for affordable housing.

There never seems to be enough affordable housing to meet demand. But it is encouraging that private organizations and governmental bodies are actively looking for solutions, providing hope for the future of affordable housing. ●

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Compared to the pre-Great Recession period when existing single-family homes for sale reached 4 million, current inventory is trending at 25% of that level, or roughly 1 million homes for sale. In addition, with mortgage rates remaining elevated, there’s no reason to believe that existing inventory shortages won’t persist, particularly in markets where construction of new homes has been limited.

Nevertheless, as with many housing trends these days, there is a lot of variation across U.S. metro areas in the rates at which new listings are hitting the market. According to a CoreLogic and Multiple Listing Service database, while there were about 28% fewer listings from May through July 2023 compared to the same period in 2022, some markets had more notable declines in new listings.

The largest slowdowns in new listings are evident in Western markets, particularly in the states of California, Arizona, Nevada and Washington. For example, when looking at the metros with the largest annualized declines, eight of the top 10 are in California, where the yearly declines in new listings exceeded 30%. This is worrisome for the region as new construction activity has lagged for many years. For instance, there were about 15,000 new homes sold in all of California during the first seven months of this year, or the same number of new homes that were sold in Houston alone during the same period.

As a result of fewer homes available for sale in these Western states, CoreLogic’s home price index forecast calls for price appreciation to be relatively higher in these markets. In July 2024, the estimated year-over-year price gain is expected to be about 6% in most Western states, including Colorado, Idaho, Utah, Nevada, Oregon, California and Washington.

On the other hand, there were 18 metro areas that recorded annualized increases in new listings from May through July. The markets with the largest increases (as shown on the accompanying chart) included Flagstaff, Arizona, and Killeen, Texas. Multiple smaller markets in Michigan and Georgia also saw for-sale inventory expand during this time frame.

The proximity of Flagstaff and Killeen to larger, warm-weather tourist destinations could explain some of the growth, as could associated declines in demand for second homes, vacation homes and Airbnb rentals in these locales. But other markets that had high Airbnb activity during the COVID-19 pandemic did not see the same inventory increases. And while Michigan is not a top destination for buyers of second homes, it was a popular Midwest location during the pandemic as it offered access to lakes and other outdoors amenities. It’s not clear, however, that the pandemic alone explains the surge in new listings across some of Michigan’s metro areas.

Importantly, supply conditions play a major role in an area’s affordability metrics. As a result, regions where new construction is likely to remain subdued will face continued home price pressures, a lack of affordability and potential population losses. Conversely, regions where new construction is meeting demand for both existing households and in-migrating residents are expected to see less pressure on home prices and better affordability. For example, due to the significant share of new construction that’s occurring in Texas, CoreLogic’s yearly home price appreciation rate for July 2024 in the Lone Star State is expected to be 1.4%, or less than one-quarter of that in Western states. ●

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Mortgage rates have continued along their volatile path since the beginning of the year with instability in no small part now being driven by turmoil in the banking system. On the other hand, the availability of existing homes for sale continues to churn along at historically low levels and is also being impacted by mortgage rate gyrations more so than at any time in recent history.

The reason that the supply of existing homes for sale is heavily dependent on mortgage rates is because 95% of borrowers with outstanding mortgage debt have a rate below 5%, according to CoreLogic data. More than 80% have a rate below 4% while nearly half (42%) of existing mortgages are locked in at rates below 3%. Given that the current mortgage rates for the vast majority of potential home sellers are significantly higher than their locked-in rate, there is no incentive for them to sell their home and give up their super low rate.

The chart on this page illustrates the evidence of the impact of mortgage rates on for-sale inventory. When rates started creeping up in the summer of 2022, the level of new for-sale listings started to decline notably. In the first six months of last year, the number of new listings entering the market was only 3% below the levels seen during the same period in 2021, CoreLogic data shows.

But as mortgage rates surged in July 2022, the number of new listings began to trend 20% below 2021 levels and dropped by more than 30% by the end of the year. The early weeks of 2023 saw barely any improvements in new listings, which were about 20% below 2022 levels and more than 30% below pre-pandemic levels of 2019 and early 2020.

While the dearth of homes for sale has been the Achilles’ heel of the housing market, particularly for those regions that have had very little new construction activity, the silver lining for the remainder of this year — which already appears fraught with more volatility and uncertainty — is that low inventory will keep home price declines at bay. This is especially important when comparing the current banking crisis to the events that led up to the Great Recession and the home price collapse that followed.

A key difference in today’s housing market is that borrowers have locked in historically low-rate mortgages, most of which are 30-year fixed loans. Current borrowers have built up nearly four times as much home equity than in the pre-Great Recession days. Leading up to that downturn, some 24% of outstanding mortgages were adjustable-rate loans that borrowers could no longer afford following the rate reset, either due to loan characteristics or job loss. Today, however, less than 5% of outstanding mortgages have adjustable-rate features.

While the low supply of homes for sale may help the market at this point of the housing cycle — given an anticipated recession and the potential fallout from the banking crisis — it does not bode well for the market in the long term since it reduces affordability and market velocity. In addition, the availability of entry-level homes for first-time buyers will remain low as current owners hold on to their homes for longer. ●

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That’s the sixth straight month that inventory has risen at a record annual pace, per Realtor.com’s data. There were 577,972 active listings in February, roughly 234,000 more homes available to buy compared to the same month last year. Notably, however, supply remains down compared to the years immediately preceding the COVID-19 pandemic. In comparison to 2017 to 2019, inventory was 47.4% lower in February 2023.

With interest rates on the rise again and buyers grappling with persistent affordability issues, inventory growth is being driven by homes spending more time on the market. The typical home sold in February spent 67 days on the market — 20 fewer days on the market than during the average February from 2017 to 2019 but 23 days longer than last year.

Mirroring the U.S. at large, homes are taking longer to sell in the country’s biggest cities than they did last year. Of the nation’s 50 largest metros, 47 saw an annual increase in time on market. Austin saw the largest jump in time on market (52 more days this year than last year), followed by Raleigh (51 days), Denver (42) and Las Vegas (42). Each of these cities saw a bump in home sales due to having less-expensive homes than larger nearby cities, but as their pipelines have normalized and affordability has waned, homes have begun to linger in listings for longer.

Selling activity also continues to dwindle, with fewer newly listed homes in February compared to the same time last year. There were 312,196 newly listed homes last month, down 15.9% year over year. New listings also remain 27% below the levels seen from 2017 through 2019.

Home prices are still rising, with the median price of homes for sale reaching $415,000 in February, up 7.8% yearly. But that’s lower than January’s 9.7% annual growth rate, as February continued a now long-standing pattern of declining price growth. Meanwhile, the share of homes with price reductions grew from 5.4% in February 2022 to 13% this year.

Realtor.com economists Danielle Hale and Sabrina Speianu noted that the share of homes with price reductions declined from January to February and that this drop-off appears to be larger than typical seasonal movements. “In the past we have seen price reductions act as a leading indicator to median list price growth,” the pair wrote on Realtor.com. “While only one month does not make a trend, this could signal a cushion for price growth.”

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