Cofounder of InstaLend, a non-bank real estate lender providing loans on single-family and multi-family properties for acquisition and rehab.
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Despite the Covid-19 pandemic, the United States has seen surges in demand for housing. According to January 2021 data from the Mortgage Bankers Association, mortgage applications for new home purchases increased by 18.9% compared to a year ago.
This rise in housing demand has been fueled in part by falling mortgage rates. Data from Freddie Mac shows, for example, that the 30-year fixed-rate mortgage average in the U.S. hit a low 2.65% in January 2021. At the end of February 2021, it hit 2.97%, still low compared to the 3.65% we saw in mid-March 2020.
However, the data tells a more complicated story when it comes to home flipping. In its year-end 2020 U.S. Home Flipping Report, ATTOM Data Solutions found that home flipping activity declined. Specifically, 241,630 single-family homes and condos in the country were flipped in 2020. This was 13.1% lower than the 2019 figure. Profit margins declined as well, although profits rose.
However, despite these recent figures, I expect that home flipping activity in the U.S. will eventually rise. Here are three predictions I have for the future of home flipping in the U.S. as the year progresses.
1. Home Flipping Activity Will Rise As Distressed Properties Enter The Market
Foreclosures in the U.S. dropped in 2020. As reported by ATTOM Data Solutions, foreclosures were down 93% “from a peak of nearly 2.9 million in 2010, to the lowest level since tracking began in 2005.”
Foreclosure rates will continue to decrease due to the federal government extending the foreclosure moratorium through June 30, 2021. However, once that foreclosure moratorium ends, there will be an uptick of defaults, and as a result of those defaults, more distressed properties will enter the market. This impending foreclosure crisis will not be nearly as bad as what we saw between 2008 and 2010 because loan underwriting is a lot more disciplined today than it was back then. However, investors will still want to buy these distressed properties to make a profit down the line.
2. More Borrowers Will Seek Non-Bank Lenders
Given increasing home prices, we’ll see an influx of property investors who will want to benefit from the market dynamics by upgrading properties and turning quick profits. If they find a good pool of potential buyers, this can be a successful home flipping strategy.
On the flip side, savvy investors will not try to time the market. Instead, they’ll try to benefit from the low interest rates. They’ll refinance and build equity on their homes, using rental income to pay off their mortgages while simultaneously increasing their monthly profits.
These investors will obviously need mortgage loans but might run into challenges with banks. For one, while banks don’t hesitate to lend to first-time home flippers, many people who flip homes for a living don’t have traditional W2 jobs. Banks are notorious for making it difficult for those without W2 jobs to qualify for bank financing.
Additionally, banks move through the lending process slowly (a study by Ellie Mae, for example, found that the time to close purchase loans in November 2020 was 49 days). Good deals can slip by fast. Buyers need to close on them as soon as possible—and it’s unlikely that a seller will want to wait well over a month to close. Distressed home buyers need fast-moving lending partners, and that is where non-bank lenders like my company can step in.
3. More Home Flippers Will Take Advantage Of Green Energy Incentives
As they start rehabbing their properties, more home flippers will look to take advantage of existing energy incentives, such as the solar credit tax guidelines former President Donald Trump extended through 2022 before he left office (homeowners who begin installing a solar panel system in 2021 and 2022 can claim a 26% tax credit).
Furthermore, given the Biden administration’s prioritization of environmental issues, more tax incentives for green measures could be on the way for homeowners. The founder of EnerYields, Hetal Parekh, mentioned in a recent interview that the Biden administration’s $2 trillion plan to promote clean energy and green retrofits for commercial buildings would help lower the building industry’s “green premium.” And Sanjay Agarwal, an international and corporate tax partner at CPA firm MGO, wrote in January 2021 that President Joe Biden “would also expand renewable energy-related tax credits,” including those for residential energy efficiency. A federal budget that big should encourage property owners to carry out green upgrades on their properties.
The dynamics the pandemic introduced to the real estate market caused home flipping activity to decline, but there will be an upcoming surge. As home flipping activity increases, we’ll also see upticks in non-bank lending and property owners taking advantage of green energy incentives. Home flipping is just one way the residential real estate market will stand in stark contrast to the commercial real estate market moving forward.
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