Retail prices across the U.S. housing market recovered in the second quarter of 2023, and so did profits for home resellers. But this increase in profit margins came even as fix-and-flip sales as a percentage of total home sales fell to a two-year low, according to Atom's Q2 2023 U.S. Home Resale Report.
From April to June, home flips accounted for 8% of all sales, down from 9.9% in Q1 2023 and 8.9% in Q2 2022. While this is still a high percentage, the decline is a notable trend historically. Notably, the average time between investor purchase and resale for home flips increased to 178 days in the second quarter, the longest since mid-2020.
Despite longer resale times, net income and return on investment (ROI) increased for the second consecutive quarter, signaling a recovery from the slump of the past two years. ROI increased nearly 5 percentage points between the first and second quarters, its fastest growth since 2020, while net income increased 18% over the same period, the fastest quarterly increase in the past decade.
The improvement reflected the overall housing market: The median price of a single-family home rose 10% during the spring homebuying season after steadily declining from mid-2022 to early 2023.
In fact, gross profit from a 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 from $56,250 in the previous quarter. However, this was a significant decrease of 35% year-over-year, as gross profit on a typical transaction in Q2 2022 was $102,063.
Typical gross profits from remodels in Q2 showed a 27.5% ROI compared to the original purchase price. This represents an improvement from the 22.9% ROI in Q1 2023 and the recent low of 22.3% in Q4 2022. While still well below the peak ROI of 61% in Q2 2021, profits from remodels are clearly increasing steadily.
The typical resale price for a resale home rose 2.1% between the first and second quarters to $308,500. This contrasts with a 1.6% drop in the average price investors could buy over the same period. It was also a reversal of a long boom in the U.S. retail home market over the past decade, as prices and profits for fix-and-flip projects have trended in the opposite direction.
While home resale rates declined in the second quarter, real estate is often a localized business, and investors should focus on areas with strong resale activity. Atom analyzed metro areas with populations of 200,000 or more that saw at least 50 home resales in the second quarter of 2023. The top five metro areas included Macon, Georgia (with resales accounting for 16.8% of total home sales), Columbus, Georgia (15.3%), Spartanburg, South Carolina (13.5%), Atlanta (13.5%), and Akron, Ohio (12.5%). Among metro areas with populations of 1 million or more, the highest resale rates were in Atlanta, Memphis, Jacksonville, Cincinnati, and Phoenix.
Additionally, some larger metro areas are realizing a greater return on investment on these projects. These locations in Q2 2023 include Akron, OH (ROI 116.7%), Pittsburgh (112.9%), Scranton, PA (93.7%), Hagerstown, MD (86.6%), and Trenton, NJ (85%). Among metro areas with populations over 1 million, Pittsburgh, Baltimore, Philadelphia, Rochester, NY, and Richmond, VA had the highest ROI.
While there are many positive signs in the fix-and-flip market, uncertainty remains. Gross profit and margin increases are gratifying, despite declining resale rates. However, it remains to be seen whether these price increases reflect the annual increases seen during the busy spring buying season or whether they represent a more permanent measure of profitability in home resale projects.
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