The decline in gross margins has pushed return on investment down to 25% from 30% last quarter. Not bad, but not as good as it was before. Still, ATTOM points out that the issue isn't the size of the margins, but how quickly they are declining.
Resales as a share of home sales also fell as profits shrunk and rising mortgage rates hurt potential buyers' ability to purchase homes. Resales accounted for about 7.5% of home sales in the third quarter, still a record high but down from 8.2% in the second quarter. Resales, defined as homes bought and sold in the past 12 months, accounted for 5.9% of all home sales in the third quarter of 2021.
While home prices are falling rapidly, renovation costs remain high.
“It's clear there's no escaping changing housing market conditions,” Rick Sharga, executive vice president of market intelligence at ATTOM, said in a press release. “With weaker buyer demand, prices trending downward over the past few months, and lending rates significantly higher than at the beginning of the year, flippers are facing a much tougher environment now and likely well into 2023.”
While home prices are still higher than a year ago, monthly increases have slowed dramatically. Mortgage rates, while down from recent highs, are still more than double what they were at the beginning of the year. As a result, home sales overall have fallen for nine consecutive months.
Mortgage rates have fallen slightly over the past two months, but that may not be much of a concern for real estate agents, as about 64% of them are buying with all-cash, which is unchanged from the previous quarter.
Another factor weighing on investors is the cost of resale. Labor and material costs remain high, and supply chain delays are still impacting the cost of renovations. The average number of days it took to resell a home fell slightly in the third quarter to 163 days after increasing for three consecutive quarters, but it's still longer than the 149 days in the third quarter last year.
The markets with the highest resale rates were Phoenix, Spartanburg, South Carolina, Atlanta and Gainesville, Georgia, and Winston-Salem, North Carolina. The markets with the highest profit margins were Buffalo, New York, Pittsburgh and Scranton, Pennsylvania, and Salisbury, Maryland.