House flipping - the practice of buying and quickly reselling homes for a quick profit - dropped sharply in the third quarter of the year, after surging in late 2012.
The number of "flips" - defined as a single-family home purchased and resold within six months - dropped 35 percent from the second quarter of the year, according to recent figures from RealtyTrac, to a total of 33,000 units. On an annual basis, flips were down 13 percent from their level in the third quarter of 2012.
Higher prices, fewer foreclosures cut into market
Rising home prices and a slower pace of foreclosures have created a market less favorable for flipping homes across most price ranges, according Daren Blomquist, RealtyTrac vice president. Increased prices mean higher up-front costs for investors seeking to flip homes, while the reduction in foreclosures cuts into the supply of available homes.
The rate of home flipping skyrocketed last year, zooming from about 22,000 homes in the first quarter of 2012 to a peak of roughly 67,000 units in the fourth quarter before cooling off this year.
Rising rents and home prices have turned many investors from house flippers into landlords, according to Sheldon Detrick, a real estate executive in the Oklahoma City/Tulsa markets, meaning they prefer to rent the property out rather than resell it for a profit.
"House flippers are kind of a misnomer as they've turned into what I like to call 'holders'" Detrick said. "Being a house flipper meant buy it, paint it, sell it. Now it's turned into buy it, paint it, rent it, and hold it."
High-value flips still going strong
Despite overall slowdown, home flipping has actually increased among higher-value properties selling for $750,000 or more when flipped. Flips among that category of homes is up 34 percent from last year, while flips among homes priced $2 million to $5 million are up a whopping 350 percent during that period.
"The sharp rise in high-end flipping indicates there is still good money to be made for flippers willing and able to take on the additional risk of buying and rehabbing more expensive homes," said RealtyTrac's Blomquist. "With that higher risk also comes the potential for higher reward. The average gross profit on each high-end flip equals more than four times the average gross profit on each flipped home in the lower price ranges."
The increase in high-end flipping meant the average profit per flip was up 12 percent from the same quarter last year, to $55,000, up from nearly $49,000 in the third quarter of 2012. The most profitable markets for flipping were in California, where average profits per flip in Ventura were $144,000 and $128,000 in Los Angeles.
More than three-quarters of all high-end flips were concentrated in just five real estate markets, the New York metro area and the California markets of Los Angeles, San Francisco, San Jose and San Diego.