Kiavi, in collaboration with John Burns Research & Consulting and Sundae, published the results of its Fix-and-Flip study for Q1 2024. It found that the Fix-and-Flip market index rose to 66 in Q1 2024, from 64 in Q4 2023 and 62 in Q1 2023.
The firm notes that an index value above 50 indicates market expansion, while a value below 50 indicates market contraction.
With more than $16 billion in loans under its belt, Kiavi (formerly LendingHome) is one of the nation's largest private lenders to residential real estate investors (REIs).
“Looking back at the fix-it-and-flip market in Q1, we saw strong investor resilience despite the high interest rate environment. Real estate investors are finding ways to weather this 'high interest rates for longer' environment, as evidenced by increased lending. In most markets, move-in ready homes sold quickly. This partially speaks to the large demographic of millennials' strong preference for move-in ready homes over homes that need fixing up,” said Charles Goodwin, Senior Sales Director at Kiavi. “We expect this market to remain strong in the second half of the year. Of course, this is contingent on the Fed's interest rate decision and continued economic strength. If inflation reports gradually decline and economic indicators such as unemployment, GDP and wage growth remain at current levels, we expect investor activity to remain strong.”
Areas of interest for repair and resale
Markets where Kiavi reported the strongest remodeling performance in the first quarter of 2024 included areas where homes are generally older and in need of repairs, where competition from new home builders is minimal and where overall inventory remains low. Leaders were in the Northeast, Midwest, California and Northwest.
The weakest home resale markets in Q1 2024 were in regions where resale inventory is increasing, where homebuilders are more aggressively outperforming the resale market through incentives, and where carrying costs (especially taxes and insurance) have recently accelerated. The weakest markets were Florida, Texas, the Southwest, and the Southeast.
Pricing Status
As of April 2024, Fannie Mae predicts that the average interest rate on a 30-year fixed-rate mortgage (FRM) in the United States will be 6.7% in the first quarter of 2024 and 6.4% by the end of the year.
Real estate flippers surveyed by Kiavi remain optimistic about sales over the next six months, but feel their expectations are heavily driven by the market. Overall, respondents feel the Fed's recent “high interest rates for longer” messaging has not dampened flipper optimism, with 47% of flippers nationwide expecting “strong sales” compared to seasonal norms over the next six months, the highest percentage since Q1 2022, when mortgage rates were in the low 3%-4% range.
Flippers also expect prices for resale homes to rise 3% over the next six months as low inventory (especially move-in ready homes) keeps prices down. As of the end of May, Zillow reported that the median U.S. home price was $358,734, up 4.3% year over year.
However, in Florida, the Southwest and Texas, resellers’ price expectations are not as high, given the inventory, competition and cost challenges mentioned above.
Flippers also expect the Fed's eventual interest rate cuts to trigger strong demand for flip homes. According to the latest consumer survey from the New Home Trends Institute, “waiting for lower mortgage rates” is the biggest obstacle holding consumers back from buying, overtaking “waiting for a change in life stage” for the first time in the survey's history to take the top spot.
Real estate use
Among flippers surveyed, 43% expect to keep more of their homes as rentals this year. In supply-constrained regions such as the Northeast and Southern California, single-family home rent growth and home price appreciation have both been strong, encouraging long-term investment and buy-and-hold strategies over short-term flips.
Among flippers surveyed, 62% in the Northeast and 53% in Southern California expect to keep more of their homes as rental properties this year, the highest rates of any region in the nation.
However, in Texas and Florida markets, where single-family home rents are the lowest and holding costs have recently increased, fewer agents are turning to rental homes, with 86% of Texas agents and 66% of Florida agents planning to hold the same or fewer homes as rentals in 2024 compared to 2023.
“The report also indicates that many flippers will increase the number of homes they hold as rentals over the next year,” Goodwin added. “We are seeing this trend in markets where rentals remain 'stable' despite rising rents. Southern markets, in particular, often allow investors to see positive cash flow, especially those who have added value through renovations. Markets such as Texas and South Florida are seeing an increase in the supply of resale properties, so holding as rentals may be a viable option for flippers struggling to resell properties. In many parts of the South, rent growth remains strong or normal.”
Resale as an affordable solution?
According to a recent analysis of homebuyers by Redfin, nearly two in five homeowners (38%) believe they would not be able to afford their home if they were to buy now. Nearly three in five homeowners who answered this question (59%) have lived in their home for at least 10 years, and an additional 21% have lived in their home for at least five years. This means that the majority of respondents have seen home prices in their neighborhood soar since they bought their home, with the median U.S. home sale price doubling in the past decade and increasing nearly 50% in the past five years alone.
“Ultimately, the fix-and-flip market could contribute to higher home prices,” Goodwin says. “Flippers tend to focus on first-family homes and are one of the main sources of supply in supply-constrained markets like California, the Pacific Northwest and the Northeast. Home prices are still rising, but without flippers doing their part to turn distressed homes into move-in ready homes, home price inflation would be even worse.”
To access the full Q1 Fix-and-Flip survey, click here.
Eric C. Peck, Digital Editor-in-Chief at MortgagePoint, has more than 25 years of experience covering the mortgage industry. He graduated from New York Institute of Technology with a Bachelor's in Communication Arts/Media. After graduation, he began his professional career at Videography Magazine in New York City before moving into the mortgage finance industry. Peck has edited three books and served as a copy editor for Entrepreneur.com.
Source link