Marty Boardman was sitting in his home office in August 2007 when he realized his life would never be the same again.
As a budding real estate investor and home flipper, Boardman He started out as a television cameraman and took advantage of the US housing bubble to build a small real estate “empire.”
But after home prices peaked in early 2006, the real estate market became increasingly unfavorable for investors. Eventually, the housing bubble burst, leaving home flippers like Boardman with financial difficulties and sparking the global financial crisis.
“I'll never forget it. The music had stopped and there were no chairs,” he told Fortune magazine.
Boardman then restructured his business, diversified geographically and began advising other home flippers on how to use auction properties to make a profit.
But now he and other experienced home flippers and housing analysts are warning that a new generation of first-time home flippers could find themselves in trouble as mortgage rates soar and the housing market enters what Federal Reserve Chairman Jerome Powell has called a “difficult correction.” Economists and analysts have also repeatedly downgraded their home price forecasts this year. Moody's Analytics, for example, now expects home prices nationwide to fall 10% from peak to trough.
The economics of flipping are simple: Flippers make a profit when they resell a home for more than the combined costs of securing and renovating it. Although flippers increase the economic value of the home through renovations, during periods of rapid home price growth, rising home prices are often their biggest source of profit. Conversely, when home prices begin to fall, flippers can easily see themselves losing money on any property they resell. Simply put, it's easy to see why a shift in the housing market doesn't bode well for home flippers.
Bruce Bartlett, a real estate investor and 20-plus year veteran of the home-flipping industry, worries that the rise of HGTV's home-flipping shows will “weed out” inexperienced flippers who have entered the market in recent years in the coming home price correction.
“It's not all smooth sailing. If you're inexperienced, it's going to be very difficult,” he told Fortune. “We've had a low interest rate environment for the last 15 years, and it's hard for anyone to recalculate. It's going to weed out the bad scalpers. They're going to leave the industry.”
Home resellers are retreating
Rising mortgage rates and labor costs are making it increasingly expensive to flip a home, which, combined with falling home prices and low inventory, makes it a tough sell for even the most experienced flippers.
As a result, many of the industry's more experienced players are becoming increasingly conservative.
“I think we're all being cautious when it comes to resellers. Prices are falling right now, so we're factoring the possibility of further price corrections into our models,” Bartlett said, noting that it's become harder to predict the sale prices of renovated homes in recent months.
Bartlett gave the example of a large home he was considering reselling in Beverly Hills: High-value homes typically take longer to renovate and sell, so Bartlett was trying to predict what prices in the area would be in three years' time.
“We know very well we won't hit that estimate exactly,” Bartlett said, “so we want to give ourselves some leeway.”
Amateurs and pros alike jumped into the market shortly after the pandemic housing boom began, and the opportunity to flip a home and rack up record price gains was too good to pass up. In fact, home flipping during the pandemic has soared to levels not seen since the housing boom of the 2000s.
Though it will take time to show up in the data (see chart above), this home resale boom is already starting to fade.
Darren Blomquist, vice president of market economics at Auction.com, the nation's largest seller of bank-owned and foreclosure homes, told Fortune he sees evidence of this more conservative approach by home flippers in a dramatic change in buyer behavior on his company's platform over the past six months: 60% of buyers are home flippers.
“It's clear that bidders are becoming more conservative,” Blomquist said.
A grim outlook: some scalpers will suffer big losses
To be clear, most home flippers and analysts who spoke to Fortune don't think the current home flipping market is as bad as it was in 2007. But they do think there's more turbulence to come.
Auction.com's Blomquist said the company has seen an increase in small home flippers on its platform over the past few years, and that if flippers continue to be “overly speculative” in the current tough market, there will undoubtedly be “adverse effects.”
“They may be in a contingency within the next three to six months,” he said.
The markets where property flippers are most at risk of losing money are cities with booming economies.
Just like in 2007, the places where resales surged the most during the housing boom are seeing the most rapid exodus of home flippers. Look no further than Phoenix, where the number of homes resold there has already fallen 60% since March, according to data provided by Cromford Reports to the local NBC affiliate. The reason is simple: The rapid changes in the Phoenix housing market are forcing many Phoenix home flippers to hold off on new purchases.
“The places that were the most booming are going to be the worst places for flippers,” said Logan Mohtashami, principal analyst at HousingWire. “Boise, Phoenix, those places are first-level red alert, danger, risk for flippers, because those places actually have the supply. You're not seeing that in other parts of the country at all.”
Decreasing number of transactions
On the one hand, it's a positive that industry insiders don't expect flippers to face a 2008-style oversupply and foreclosure crisis in 2022 or 2023. On the other hand, it means changes in the housing market are unlikely to produce the kind of resale transactions that the last housing downturn brought.
Not only did the sales of distressed homes around 2008 create opportunities for remodeling, but the housing downturn also reduced competition for resale. Amateurs left, and professionals who were able to purchase homes at steep discounts made the money.
“It's a much more problematic environment now than it was in 2005, 2006, 2007 and 2008 when credit collapsed and we had the unemployment recession, because there was a lot of distressed property that came into the system over the next few years. So that was a paradise for resellers,” Mohtashami said. “But here [in 2022 and 2023]that's quite different.”