Looking back, all the signs were there in 2006: Home-flipping reality shows were airing on television. Thousands of amateur home flippers jumped on the bandwagon, often taking out mortgages they never should have received and flipping multiple properties at once.
So when the housing bubble burst in 2007, people who made big bets by buying second-rate homes, quickly renovating them, and selling them at a profit were among those who lost the most.
A decade after the housing crisis triggered the worst economic downturn in U.S. history, the number of people flipping homes is back to pre-recession levels. Nationwide, more than 51,000 homes were flipped in the second quarter of 2016, the highest number since 2010. The Philadelphia area saw an even faster increase, reaching levels not seen since 2006.
So the question arises: If home flipping, which federal researchers have deemed a key driver of the Great Recession, is coming back into vogue, does it signal a new crisis? And what does it mean for the Philadelphia region, one of the nation's busiest and most lucrative resale markets?
“We're starting to see some very early signs that some markets are reaching milestones in resales similar to those we saw a decade ago,” said Darren Blomquist, senior vice president at Atom Data Solutions, which tracks real estate across the U.S. “There's certainly a concern that too much resale could overheat some of these markets.”
“But,” Blomquist continued, “we're not there yet.”
At first glance, it might seem like a new bubble is waiting to happen — home flipping is booming again, credit conditions are easing and home prices are soaring while wages aren't keeping up — but that's not enough to worry about, at least for now, observers say.
Compared to the early 2000s, when people jumped on the market hoping prices would rise simply because the market was hot, today's resales are being driven by specific factors: aging housing inventory, a lack of new construction and a low inventory of homes for sale.
This combination has naturally led to higher home prices compared to a decade ago, when home resales themselves would have skyrocketed values and artificially inflated nearby home prices.
As a result, local real estate agents are racing to transform older homes into modern, attractive properties. Lending requirements remain strict, making the financial side of buying and selling less volatile as agents turn to cash, hard-money lenders and crowdfunding companies rather than banks as they did a decade ago.
At least half of Philadelphia's homes are estimated to be more than 60 years old, and while many parts of the city still suffer from decline, observers say the area offers an ideal scenario for flippers: the opportunity to buy low, renovate quickly and sell for much more as the neighborhood gentrifies.
As a business model, it's working: The Philadelphia metropolitan area, defined as Pennsylvania, New Jersey, Delaware and parts of Maryland, saw 1,344 resales in the third quarter of 2016, accounting for 6.2% of total sales, according to Atom.
And the region's flippers are making the most profit: During that same period (the most recent data available), they made an average gross return of nearly 115% on their investment, the fourth-highest in the nation.
They are concentrated in areas with high resale potential due to low property values in foreclosure, poverty, or gentrifying neighborhoods, and local activity is primarily outside of Center City.
The most profitable markets are Fishtown and Kensington, according to an Inquirer analysis of Atom data that excluded ZIP codes with nine or fewer resales in the third quarter of 2016. With 18 resales recorded between July and September, representing 10 percent of the metro market's total sales, resellers there earned an average gross profit of $159,950, excluding renovation costs, the data showed.
“There's been explosive growth in these areas,” said Chris Summers, owner and real estate flipper at Re-Max Access in Northern Liberties. “If someone has the opportunity to acquire a desirable property there, it's definitely an opportunity for a high profit.”
Kelly Straka is no stranger to such opportunities: Since the late 2000s, the 32-year-old real estate investor has been flipping homes in Kensington, Fishtown and Northern Liberties.
It started with an obsession with design: When the market was in turmoil and homes weren't selling, Straka was approached by flippers and sellers to stage their properties to make them more appealing. But that changed.
“People hired me to get rid of things that developers had just installed, and they weren't happy with how everything was so one-size-fits-all,” Straka said. “It all just snowballed from there.”
Straka's project combines her design experience with her obsession with resale, no small task. “I dismantled and changed the layout, [the homes] We've worked really hard to improve it down to the studs, while still retaining some of the character.”
“I use a lot of exposed brick, exposed beams, tile and different light fixtures,” she says. “People look at me and say, 'You're crazy, how much did you spend on all that?'
“But each one is different, which is fun for me. And it's cool for buyers, too, because they're different from the others.”
Taking risks has paid big rewards, Straka says: By 2018, he had completed 12 projects, each earning between $30,000 and $100,000 in profits.
“You hear a lot about Fishtown and places like it, but you can still buy one for $100,000 or $150,000,” she said.
In fact, Atom found that the Philadelphia area was the fifth cheapest market to buy in the U.S. in the third quarter. Topping the list as the cheapest neighborhoods were North Philadelphia, Strawberry Mansion and West Philadelphia-Mill Creek-Dunlap, according to Inquirer analysis.
Still, Atom's third-quarter data found Willingboro in Burlington County to be the hottest market, with 12 resales recorded there, accounting for nearly 29% of the county's sales.
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McCabe Caitlin