As noted in this Wall Street Journal story, 2016 was an exceptional year for the house flipping industry. Flipping transactions reached near record levels and industry gross profits achieved an eleven-year high. According to ATTOM, the parent company of RealtyTrac, sales of flipped homes surpassed $48 billion in 2016, making it the highest sales volume in a decade.
A robust house flipping market spurred demand for asset-based financing and was the catalyst for an excellent performance by mortgage pool funds. Many funds were able to grow their lending portfolios by 20-30 percent in 2016 and ended the year with record assets. Approximately one-third of house flipping deals in 2016 were financed with debt, a percentage not seen in eight years. Mortgage pool funds and other non-bank lenders supplied the housing flipping industry with an estimated $16 billion of financing in 2016. As a percentage of the total market, lending by non-bank lenders continues to expand, but still represents a tiny portion of the overall mortgage industry, which originated nearly $2 trillion of new loans last year.
Many of the factors that helped fuel record performances for house flippers and their mortgage pool fund lenders remain in place for 2017. Here is a closer look at current trends impacting the industry’s key growth drivers:
Rising Mortgage Rates
Treasury yields have increased by more than 50 basis points since the November election and the Federal Reserve Bank has indicated plans going forward for multiple small rate hikes. The Mortgage Bankers Association predicts that interest rates on 30-year fixed-rate mortgages will rise gradually during 2017, averaging 4.7 percent by year-end. Furthermore, the National Association of Realtors forecasts 30-year fixed mortgage rates in 2017 to average 4.6 percent. This represents a nearly 80 basis point increase from long-term fixed rates that averaged 3.78 percent during 2016.
Expectations for rising interest rates are supported by plans outlined by the Trump administration calling for more stimulus, deregulation and spending on infrastructure programs. Although higher rates raise the cost of real estate transactions, rising rates usually also signal a growing economy, which is often accompanied by a strengthening real estate market. Economists expect rate hikes to come gradually, which will allow for upticks in home prices and building starts. Despite higher rates, home purchase activity is not projected to slow meaningfully since interest rates will remain well below historic levels. During the last housing boom, long-term mortgage rates averaged more than 100 basis points higher at approximately 6 percent.
Higher Home Prices
Recent data in the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index shows that home prices are continuing to rise. However, price gains have cooled in the last two years. From double-digit gains early in the economic recovery, home price hikes have slowed to a 5-6 percent annual rate. According to Dow Jones, while home prices will likely continue to rise faster than wages and personal income in 2017, high consumer confidence levels and low unemployment rates suggest there will be no reversal in home price growth trends.
Due to an improving economy, more borrowers are now able to qualify for home loans and low mortgage rates provide a steady impetus for demand. At present, the inventory of existing homes is not large enough to satisfy demand and supply/demand imbalances have been a major contributor to home price gains around the country. Most experts speculate that home prices will continue to rise in 2017, but at a slower annual rate averaging around 5 percent.
Housing analysts predict that the supply of existing homes will increase slightly in 2017, but also expect housing inventories will remain below the six-month supply level that is considered desirable. The US housing inventory had posted 18 consecutive months of year-over-year declines. According to the National Association of Realtors, it has been more than four years since the US has experienced an optimal housing inventory and housing stocks are not expected to improve meaningfully in 2017.
Housing Supplies Remain at Historically Low Levels (Source: US Census Bureau)
Home sales remained unusually strong during the 2016 holiday season, according to Realtor.com, which is a reversal of the customary trend of seasonal slowdowns. Some housing analysts predict that 6 million existing homes will be sold in 2017, up from 5.3 million homes last year.
New Home Sales
Economists are forecasting relatively steady gains in new home sales in 2017 despite rising interest rates. However, the supply of new homes will remain constrained by shortages of both buildable land and skilled construction workers.
New construction rose 9 percent in 2016, but building remains below historical averages due partly to labor shortages. At present, the labor force employed in residential housing is 40 percent below its 2006 peak. The labor situation is unlikely to improve in 2017 since stricter immigration policies are signaled by the Trump administration. Roughly one in four construction workers is an immigrant.
New home sales have more than doubled from roughly 270,000 units at the beginning of the economic recovery to approximately 563,000 units last year. Housing experts project the new construction rate will range between 5 and 6 percent in 2017, which implies approximately 590,000 new homes built this year.
Strong interest from home buyers, more borrowers qualifying for loans and a modest increase in the number of homes for sale should enable the housing market to expand further during 2017, albeit at a slower pace than last year. Home price gains are likely to hold steady. Buyer demand and rising home prices should create investment opportunities for the fix-and-flip industry and support another year of healthy flipping volume. Many of these transactions will be financed with debt and mortgage pool funds are expected to supply a greater share of the financing. In addition, as interest rates rise, mortgage pool funds may be able to generate increasing returns for their subscribers.