Buying a home, renovating it and then quickly selling it for a high price remains a lucrative business, but new real estate data shows that home flipping is no longer as profitable as it once was.
Investors flipped more than 407,000 single-family homes and condominiums last year, up 58% from 2020, according to data released Thursday by real estate data firm ATTOM. The average profit on those sales was $67,900. While that may seem like a sizable gain, it's the lowest since the 2008 financial crisis, which was triggered by the collapse of the housing bubble.
ATTOM has been measuring home flipping activity since 2005, and the most profitable year in net monetary terms was 2021, when investors made an average of $70,000 per property. The least profitable year for investors was 2008, when they made just $30,000 per property. Home flipping was especially profitable in 2013 and 2016, when investors generated an average return on investment of 51% per property.
The main reason resale profits are declining is the same economic trend that's making trips to the grocery store a pain for many consumers: inflation, which is driving up the cost of home improvements.
“Overall, the broader inflationary pressures are also showing up in the costs of materials and labor used to renovate properties,” Atom CEO Rob Barber told CBS MoneyWatch.
According to Forbes, the cost of home-improvement projects has risen by 20% to 35% in the last year, and the average price for renovating a kitchen and master bathroom is $20,000 and $13,500, respectively, according to online home-improvement marketplace Houzz.
The bottom line? While home flipping can still be profitable for experienced real estate investors who can better quantify how much a property's value will increase with improvements, “new entrants into the field may be facing an especially tough time right now,” Barber said.
Rising interest rates cause sharp drop in mortgage applications 02:53
As the spring home-buying season gets underway, the challenge for would-be flippers is finding a property to flip. Existing home sales jumped 14.5% in February from the previous month, according to the National Association of Realtors, the biggest monthly increase since July 2020, when many city dwellers sought better places to escape the pandemic.
Potential homebuyers are currently scrambling to buy properties, in part because of concerns that mortgage rates may rise later this spring.
“This year's spring homebuying season got off to an early start with eager buyers eager to take advantage of any improvements in homebuying,” Orfe Divongay, senior economist at Zillow, told CBS MoneyWatch.
ATTOM tracks real estate resale activity for individuals and business owners who buy, renovate and sell real estate. The survey found that investors typically buy a home for $252,100, renovate it and then resell it for about $320,000 in about 164 days, 12 days longer than in 2021.
ATTOM also found that the South and West saw the largest increases in the number of resale homes last year, particularly in Bremerton, Washington; Jackson, Mississippi; Honolulu, Hawaii; and Prescott, Arizona.
According to ATTOM, investors made the biggest gains after flipping homes in New York City, San Francisco, San Jose, Seattle and Washington, D.C., while they made the least gains in Kansas City, Indianapolis, San Antonio, Houston and Dallas.
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Christopher J. Brooks