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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It also marked a significant increase from the 25% of average wages required for major homeownership expenses seen in early 2022, shortly after mortgage rates began to spike. The newest figures signal worsening affordability for homeownership across the country. In fact, median-priced single-family homes and condominiums were less affordable in Q2 2023 compared to historical averages in a whopping 98% of the counties analyzed in the report.

The U.S. median home price rose to a record $350,000 in Q2 2023, a 10.2% gain from the prior quarter. This increase came on the heels of three straight quarterly declines, which had many observers heralding an end to the decade-long home price boom. This unexpected price surge contributed to an increase in homeownership expenses that outpaced wage growth, resulting in a significant decline in home affordability. These widespread increases were reflected in quarterly price growth for 524 of the 574 counties (91%) included in the report. Prices jumped by at least 5% in nearly two-thirds of the markets analyzed, while nearly 40% saw prices reach peak levels.

In a bright spot for buyers, weekly annualized wage growth outpaced home price growth for the year ending in Q2 2023 in 74% of these counties. This compared favorably to Q2 2022, when price growth exceeded wage growth in 91% of the same markets.

Although wage increases help to temper declines in home affordability, it’s still an uphill battle for the average buyer. At the national level, mortgage payments, homeowners insurance, mortgage insurance and property taxes cost an average of $1,949 per month, or 33.4% of the average annual income of $70,031. That’s up from the 29.9% DTI recorded in both Q1 2023 and Q2 2022, and it marked the highest DTI since 2007.

Location is always a key factor in affordability and, unsurprisingly, coastal areas continue to lead the charge among the least affordable markets. In fact, 19 of the top 20 counties where major homeownership expenses eat up the largest percentage of wages are located on the east and west coasts, led by Santa Cruz County, Calif. (where 116.8% of annualized local wages are needed to buy a single-family home).

Despite a nationwide average annual income of about $70,000, wages of more than $75,000 were needed to afford a median-priced home in 51% of the markets analyzed in Q2 2023. Each of the top 25 markets with the highest yearly wages needed to afford a typical home were on the coasts, with homes in certain parts of New York and California requiring yearly wages in excess of $300,000.

But on the other end of the spectrum, there are counties where annual wages of $14,000 to $25,000 are enough to purchase a median-priced home: In Cambria County, Pa. (near Pittsburgh), a buyer with an annual income of $14,715 could afford a median-priced home, while in St. Lawrence County, N.Y. (near Syracuse), an annual income of $25,405 will cover the major costs of homeownership.

Although the recent home price surge has dampened affordability, it remains to be seen where the market will go from here. This could be a reflection of the pricing uptick seen each year during the peak purchase season, or it could be an anomaly that is quickly tempered by other economic forces. Factors like mortgage rates and stock market fluctuations will play a key role in whether affordability will continue to worsen in the near future. ●

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In addition, the average tax on a U.S. single-family home in 2022 went up 3% to $3,901, compared to a more modest increase of 1.8% in 2021. Still, the nationwide effective property tax rate was only 0.83%, down from 0.86% in 2021 and the lowest rate since at least 2016.

The effective tax rate, or the percentage of a property’s value paid in taxes, declined in 2022 even as total taxes increased, which is due to the continued rise in home values. Last year, U.S. home values increased faster than taxes, and despite the housing market slowdown, the average estimated single-family home value rose 7.9%. This growth easily exceeded the average tax increase, resulting in a small dip in effective tax rates.

Market forces paint a tough picture for homeownership opportunities moving forward, if current trends continue. Although home prices have started to decline, they have yet to recede significantly in many markets. Meanwhile, higher mortgage rates, persistent consumer price inflation and other economic factors continue to form strong headwinds to affordability. It seems likely that residential property tax trends will continue their upward path, considering the needs of local governments and school systems faced with rising inflation and declining tax revenues tied to a drop in commercial real estate values.

Of course, these national trends can look vastly different through a local lens, which will greatly influence homeownership affordability in specific parts of the country. It’s interesting to note that the states with the highest effective property tax rates are not necessarily the same as the states with the highest average property taxes, although there is some overlap. Notably, New Jersey leads both categories.

The states with the highest effective property tax rates in 2022 were New Jersey, Illinois, Connecticut, Vermont and Nebraska. The states with the highest average property taxes last year were New Jersey, Connecticut, Massachusetts, New Hampshire and New York. The average tax of $9,527 on a single-family home in New Jersey was more than 10 times higher than the $928 figure in West Virginia, which had the country’s lowest average property tax. At the other end of the spectrum, low effective tax rates and low average property taxes are found in many of the Southern states. Surprisingly, however, Hawaii had the lowest effective tax rate in the U.S. in 2022 at 0.3%, followed by Alabama, Arizona, Colorado and Tennessee.

Drilling down past the state level, average property taxes in many major metro areas saw larger increases than the national average. In fact, 65% of the 223 metro areas analyzed in the report saw taxes rise faster than the U.S. as a whole in 2022. Most of these metros were in the South, where taxes rose 5.8% on average, and in the West, which saw an overall increase of 5.5%.

Some large metro areas with a population of at least 1 million had significant increases in their average property taxes from 2021 to 2022. In Pittsburgh, taxes increased year over year by a whopping 59.6%. It was followed by Rochester, New York (up 23.2%); Honolulu (up 15.3%); Salt Lake City (up 14.3%); and Miami (up 12.6%).

Although property taxes vary widely from state to state (and sometimes from city to city), the national trend is one that speaks to rising expenses that hamper affordability, creating financial concerns for existing homeowners and potential homebuyers alike. These numbers bear watching as economic and market shifts influence the housing industry. ●

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In fact, a key affordability threshold was crossed at the end of 2022. On a national level, the portion of average wages required to pay the major expenses of homeownership increased to 32.3%, a figure deemed unaffordable by traditional lending standards (i.e., a 28% debt-to-income ratio). The portion of average wages needed to own the typical home now stands at its highest point since 2007.

Affordability issues have long been under scrutiny by those in the real estate and mortgage industries, as the housing market has seen historic or near-historic price gains in recent years. But these gains were largely tempered by historically low mortgage interest rates — a factor that has flipped in the opposite direction over the past year. Affordability has been crippled by rising rates that more than doubled in 2022 and topped 7% for a short time. These increases weren’t offset by rising wages or the small declines seen in home prices.

Economic forces also are coming to bear on homeownership affordability. The stock market has seen significant declines and remains volatile. Wages increased by 7.4% during the past year, although this growth slowed to 1.3% between the third and fourth quarters, while the 6.5% inflation rate to end the year remained near a 40-year high point. These influences have helped to drive down home prices after a decade of gains. The U.S. median price dropped by 3% from Q3 to Q4 and finished last year nearly 7% below its peak in Q2 2022.

Affordability across most of the country worsened significantly in 2022. Median home prices in 577 of the 581 counties analyzed this past fourth quarter (99%) were less affordable compared to historical levels. This number was significantly higher than the 393 counties (68%) in this category a year earlier and more than three times higher than the 181 counties (31%) classified as such in Q4 2020.

Even when taking historic norms out of the equation, homeownership at that time was considered unaffordable to average local wage earners in 427 of the 581 counties analyzed in the Attom Data report (or 74%). Unsurprisingly, large urban metros in desirable locations were among the areas with the most affordability issues in Q4 2022. These include the California counties of Los Angeles, San Diego and Orange; Maricopa County (Phoenix), Ariz.; and Kings County (Brooklyn), N.Y.

Some of the same counties require the largest portion of average wages in order to own a home. Leading the way in this unaffordability metric is Santa Cruz County, Calif., where 124.7% of annualized weekly wages are needed to buy a single-family home. It was followed by Kings County, N.Y., at 114.6%; Marin County, Calif., at 109.6%; and Maui County, Hawaii, at 104.3%.

There still are several metro areas that are more affordable, where major expenses for median-priced homes remain within reach for the average local worker. The most populous counties that remain affordable (as the chart on this page shows) include the core municipalities of the Chicago, Houston, Detroit, Philadelphia and Cleveland metro areas.

Despite these somewhat disheartening figures, there is potential for improved affordability in 2023, especially as home prices appear to be stabilizing and even shrinking slightly. If wage growth continues to be strong and interest rates level off or drop gradually, buying a home could be an affordable option for many more potential borrowers. ●

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Although data and machine learning influence marketing, this technology also has a role to play in real estate. Traditionally, mortgage lenders were tied to assessing prospective borrowers and current clients based on their credit score, credit report, income, assets, debts and job history. Property valuations depended on trained appraisers to compare properties.

Big data can now be harnessed to improve lender understanding of clients, to evaluate property, to increase efficiency and to mitigate risk. For mortgage lenders and the originators who work with them, technology offers the opportunity to widen the credit window while making it easier to assess the creditworthiness of consumers with thin credit reports and multiple gig-economy jobs. 

For mortgage lenders and the originators who work with them, technology offers the opportunity to widen credit windows.

Information gathered from bank statements, loan files, tax returns, credit reports, credit-card statements and more can be aggregated to predict consumer behavior. Consumers themselves can benefit from a more efficient process, speedier underwriting and the use of analytics that can streamline their online experience. 

Of course, one of the most important elements of any real estate transaction is the property itself. Big data has an essential role to play in helping lenders evaluate the underlying assets for their mortgages and determining whether a trans- action should go forward.

Powerful tool

Lenders of all sizes, as well as real estate investors, have long relied on the expertise of appraisers to establish the value of both residential and commercial properties. As machine learning and artificial intelligence have become increasingly accessible to all types of businesses, automated home valuations (AVMs) also have gained popularity. 

Among the best-known AVMs are those found on real estate sites such as Zillow and Redfin, but users have often complained about the broad range of estimated values. Typically, these consumer-facing estimates are designed to generate leads for real estate agents and the actual property value may be entirely different.

Lenders, however, have access to more sophisticated AVMs based on an even larger pool of data. These AVMs rely on data-bases with historical information about property sales, tax assessments, mortgage liability records and recent transactions, both within local markets and on a wider scale. Unlike appraisals, which are at least partially subjective and rely on a handful of comparable homes, AVMs are objective and have a comprehensive pool of similar homes. 

The accuracy of any valuation, whether done by an appraiser or an automated system, depends on the inputted information. In an automated valuation, the sheer volume of information can offset the instances of dirty data — data with erroneous information — to a small degree. 

An appraiser, who has access to only a small amount of local market information, can be more at risk of relying on faulty facts. Appraisals that rely on an individual evaluation of a property, however, have one advantage over a machine: A human looking directly at the condition of the property can have extra insights into things such as the view, the location on the block, and the state of the appliances and systems. 

An AVM can be particularly valuable for certain properties, such as when a homeowner is refinancing, or if they are taking out a home equity loan or line of credit. A full appraisal may not be necessary when a lender has already done an evaluation of the property when it was purchased. For purchase applications, an AVM can sometimes be a substitute for a traditional appraisal, particularly if the home is similar to others in the neighborhood. A unique home may require an in-person appraisal for accuracy, although an AVM can even be valuable under these circumstances because the data can encompass far more potentially comparable properties. 

One other benefit of an AVM can be speed. At a time when mortgage originators are sometimes overwhelmed with refinance applications or in a hot real estate market, in-person appraisals can take too long to schedule. An accurate AVM can be done more quickly with the help of technology.

Evolving regulations

Although full appraisals are still required on many real estate transactions, the rules are changing in favor of automated home valuations. The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, for instance, offer appraisal waivers for some purchase and refinance transactions. There are a number of stipulations that must be met to qualify for an AVM through the agencies.

Last year, federal regulators changed the home-value limits for appraisal requirements, a move that was anticipated to impact about 40% of all home sales. Transactions that involve properties of $400,000 or less will no longer require an appraisal. Previously, the threshold for an appraisal exemption was $250,000. It was the first time in 25 years that regulators had increased the limit for requiring an appraisal. Instead of an appraisal, lenders for these properties must obtain an evaluation of the property’s estimated market value. 

This new exemption does not apply to loans sold to the GSEs, or those guaranteed by the Federal Housing Administration or U.S. Department of Veterans Affairs, Fannie Mae or Freddie Mac. Many of these mortgages still require an appraisal. The impacted loans are typically portfolio loans held by lenders or sold to investors through the private securitization market. For commercial real estate, no appraisal is needed for properties priced below $500,000.

Relevant solution

Independent mortgage brokers, as well as bank and nonbank originators, need accurate property valuations to successfully underwrite loans. The increasing reliability of AVMs makes them relevant for any real estate evaluation. Evaluating property values with an AVM instead of a standard appraisal depends heavily on accurate data. 

AVMs can vary according to the inputs and the volume of information included. This can include such things as county tax records, mortgage records, recent sales history, the age of the home, historical price movements, an analysis of comparable properties, property improvements and physical characteristics of the property, including the square footage and the number of bedrooms and bathrooms. 

Mortgage lenders and originators should look for an AVM that collects and analyzes premium property data through the use of multiple sources for property tax, deed, mortgage, foreclosure, environmental risk, natural hazard and neighborhood data. The more data that’s included — and the more accurate that information is — will make the AVM more useful.

This can be a valuable tool for lenders and originators. AVMs for residential or commercial properties can be as accurate — or even more accurate — than a traditional appraisal, provided the data included is precise and thorough. For mortgage professionals, the use of big data to evaluate buyers and properties has been increasing in recent years and is likely to become more common as access to accurate data grows. 

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