Saturday, August 31, 2013

Home Flipping Makes Comeback

“Home flipping,” a term used to describe buying a home at a discount, refurbishing it and then selling it a profit, is making a comeback thanks to the recovery in the U.S. housing market. Experts say the time is ideal for flipping because properties are still available for a bargain in many areas, but are rising quickly in value. Reality TV made the practice look easy for a time, but many found out it was harder than it looked after the financial crisis led to a housing market tumble. Now, analysts say the best places to flip homes are those areas that suffered the most during the crash, like Arizona, Florida and Nevada. 

The rebounding U.S. real-estate market is leading to a renaissance in "home flipping" -- the investment strategy in which you buy distressed houses, make minor upgrades and resell the properties a few months later for quick gains.
"Right now is an ideal [time] for flipping, because we're seeing home prices bounce off of the bottom," says Daren Blomquist of RealtyTrac.com, which recently named the 25 Top U.S. Markets for Flipping Homes -- including some that offer more than 50% gross returns.
Made popular by reality-TV shows such as Flip This House>, home flipping looked easy during the housing boom when prices kept rising. The strategy became decidedly harder during the real estate bust that followed.
Now, flipping is enjoying a comeback because home prices have bottomed out in many U.S. locales and begun to rebound.
Blomquist says today's best markets for flippers soared during the boom and collapsed during the bust. Many are also in the so-called "Sand States" of Arizona, Florida and Nevada, which suffered through some of the nation's highest foreclosure rates in recent years.
"These markets all crashed pretty hard, so they've got lots of available distressed properties," Blomquist says. "But they're also perpetually popular with consumers because they're located in the warmer climates that many people want to move to."
Here's a look at the five metro areas RealtyTrac believes offer today's best opportunities for home flips (defined as buying and selling the same property within six months).
The site ranked each city based on how much gross profit local home flippers enjoyed in percentage terms on the average 2012 single-family sale, excluding renovations and other expenses beyond what investors initially paid for properties. All cities also had at least 500 home flips during 2012, as well as 9% or higher average annual home-price appreciation during 2013's first quarter. 
Fifth-best U.S. city for home flippers: Memphis, Tenn.
Average gross profit on 2012 deals:
 42%
Memphis is unusual among the markets at the top of RealtyTrac's list that it's not in a Sand State, nor did it have the massive housing boom and bust other cities saw in recent years.
Still, Blomquist says the 1.3-million-person metro area is hot among flippers because it's got lots of older houses that cost little to buy and lend themselves to quick fix-ups and resales.
RealtyTrac found that the average Memphis home flipper paid just $68,318 per house last year (the lowest price among the top five cities in the rundown), but resold properties for $96,870. That's a 42% gross gain.
Another plus: The average Memphis home price rose at a 13% annual rate in 2013's first quarter. 
Fourth-best U.S. city for home flippers: Tampa, Fla.
Average gross profit on 2012 deals:
 43%
The U.S. housing bust and foreclosure crisis slammed Tampa, but Blomquist says that means the 2.9-million metro area has lots of distressed properties for flippers to choose from.
The Cigar City also has an aging housing stock that's ripe for renovation, plus a warm climate that's popular with consumers -- all of which add up to great potential for home flips.
RealtyTrac found that the average Tampa property flipper enjoyed a 43% gross return in 2012, paying $79,538 for a house but selling for $113,676. Average Tampa home prices also rose at a 9% annual rate during the three months ended March 31. 
Third-best U.S. city for home flippers: Phoenix, Ariz.
Average gross profit on 2012 deals:
 44%
Like the phoenix of Greek mythology, the Phoenix housing market is rising from its own ashes.
One of the U.S. cities hardest hit by the housing bust, Arizona's capital has recently seen real estate rebound sharply. Average Phoenix-area home prices soared 33% between 2012's first quarter and 2013's opening three months -- the strongest appreciation of any city atop RealtyTrac's rankings.
All told, the typical 2012 Phoenix home flip generated a 44% gross return, with investors paying $146,528 on average per property but selling for $210,290.
Still, Blomquist warns that Phoenix home values are rising so fast that he sees "the biggest red flags among any of the top five cities on our list. The market there might be overheating and a new bubble forming." 
Second-best U.S. city for home flippers: Las Vegas
Average gross profit on 2012 deals:
 53%
Las Vegas had America's highest foreclosure rate for 60 straight months between mid-2007 and mid-2012, but Sin City's housing market is rebounding faster than you can say "hit me."
Average home prices in the 2 million-population metro area rose at a 24% annual clip during the first quarter, while the typical local flipper paid $133,198 per home in 2012 but sold for $203,945. That works out to a 53% gross return.
"Las Vegas had a very dramatic boom-and-bust cycle over the past seven years, but prices probably overcorrected," Blomquist says. "Investors finally realized that prices got too low, so it's made sense to them to jump back in." 
Best city for home flippers: Orlando, Fla.
Average gross profit on 2012 deals:
 63%
Walt Disney World's (DIS) hometown has become a real Magic Kingdom for home flippers.
Blomquist says that while Orlando had one of America's worst foreclosure rates over the past five years, average local home prices rebounded at a 12% annual rate during 2013's first three months.
RealtyTrac also found that flippers paid a modest $103,701 on average per property in 2012 but sold for $168,677 -- a 63% gross return.
Blomquist says Orlando homes have historically enjoyed strong resale demand from retirees and warm-weather lovers. He adds that if you can't successfully flip a home, you can usually turn it into a vacation rental -- "a good, solid fallback plan."
This article was republished with permission from TheStreet.

Saturday, August 24, 2013

Home Value Highest Since '07 as U.S. Houses Make Cash

More American homeowners will be able to use their properties as cash machines again after real estate equity jumped last year by the most in 65 years. Property owners recaptured $1.6 trillion as home values climbed to the highest levels since 2007. The amount by which the value of the houses exceeds their underlying mortgages rose to $8.2 trillion last year, a gain of 25 percent, according to Federal Reserve data.
An expanding group of homeowners is able to get cash from their properties as banks show more willingness to make home equity loans with the market’s recovery. Originations for the mortgages should rise 10 percent to almost $83 billion this year, from about $75 billion in 2012, said Shaun Richardson, a vice president at Icon Advisory Group, a mortgage analytics firm in Greensboro, North Carolina. About 6 percent of lenders eased equity-mortgage standards at the end of 2012, the most in 18 months, according to the Fed.
“Lenders are starting to come back into the marketplace,” saidGreg McBride, a senior financial analyst at Bankrate Inc. “We’re not going back to the wild, Wild West we saw during the real estate boom, but we are going to see more people spending their equity.”
Americans went on a spending spree in the five years before the 2006 peak of the real estate market, tapping about $800 billion of their rising equity to spend on everything from cars and televisions to debt consolidation and college tuition.
Declared Worthless
At the beginning of the financial crisis in 2008, close to $1 trillion of the loans were outstanding at U.S. banks and credit unions, an all-time high, according to the Fed. In the housing crash that followed, banks wrote off, or declared worthless, about $251 billion of home equity loans, according to the Federal Deposit Insurance Corp.
The year-old real estate recovery is helping to ease defaults. The volume of equity loans 90 days or more overdue dropped 25 percent in the fourth quarter to $3.2 billion from the prior period, according to the FDIC. As a result, banks are beginning to view equity lending as a potential source of income, rather than losses, said Stuart Feldstein, president of SMR Research Corp., a consumer-lending research firm in Hackettstown, New Jersey.
“This could be the year banks see the home-equity business return to black ink, as long as defaults continue to decline,” Feldstein said.

Credit Quality

Home-equity mortgages held by banks probably will yield a 0.2 percent return on assets this year, which is the after-tax income on outstanding loans, Feldstein said. Improvements in home prices and credit quality over the next two years should put profit back to the pre-bust level of 1 percent to 1.5 percent return on assets, he said.
JPMorgan Chase & Co. (JPM)Bank of America Corp. (BAC)Wells Fargo & Co. (WFC) andCitigroup Inc. (C), the top four U.S. banks by assets, hold $319.6 billion of the loans, about half of the outstanding balance of $652.6 billion, according to the Federal Deposit Insurance Corp. Bank of America has the most home-equity loans, at $102.6 billion.
Unlike first-lien mortgages, banks retain most of their equity originations on their books. Only about 2 percent are securitized on the secondary market, said Feldstein. There are two kinds of home-equity mortgages: lines of credit, known as Helocs, and closed-end loans borrowed in lump sums.
Helocs are adjustable loans tied to the prime rate, the interest charged by banks to their most creditworthy customers, with the addition of a margin pre-determined by the lender. The national average prime rate has been 3.25 percent since the end of 2008, as measured by Bloomberg.

Average Rates

The average rate for a Heloc last week was 5.11 percent, down from 5.22 percent a year ago, according to Bankrate.com, an interest-rate aggregator in North Palm BeachFlorida. That puts the average margin at close to 2 percent.
Closed-end loans, sometimes called He-loans, are usually fixed-rate junior mortgages or first liens used to refinances. The average U.S. rate for a closed-end loan was 6.13 percent last week, according to Bankrate. A year ago, the rate was 6.39 percent.
Lenders usually require borrowers to retain at least 20 percent equity, meaning the junior mortgages added to the primary loan can’t exceed 80 percent of a home’s value, Bankrate’s McBride said.
“You won’t be able to borrow on every last nickel of your equity,” McBride said. “After watching what happened to home prices during the housing downturn, lenders want a sufficient margin to protect them.”

Value Evaporated

About $6.5 trillion of residential real estate value evaporated after a wave of mortgage defaultssparked the 2008 financial crisis. The median U.S. home price hit bottom in 2012 after a 33 percent drop, as measured by the National Association of Realtors. In February, the median price was up 12 percent from a year earlier, the trade group said last week.
The S&P/Case-Shiller index of property values in 20 cities increased 8.1 percent in January from the same month in 2012 after rising 6.8 percent in the year ended in December, the group said today in New York. January’s gain was the most since June 2006, and exceeded the 7.9 percent median forecast by economists in a Bloomberg survey.
“Owners who have been sitting in their homes and watching their equity go up will be more likely to borrow and to spend, and more likely to take risks like looking for another house,” said Craig Focardi, senior research director at CEB TowerGroup. “Having home equity is a financial cushion to the average consumer’s personal balance sheet.”

Reviving Market

A reviving real estate market added to gross domestic product last year for the first time since 2005, according to the Bureau of Economic Analysis in Washington. The economy probably will grow at a 1.9 percent pace in 2013, the fourth year after the end of the recession, according to the median forecast of 83 economists surveyed by Bloomberg.
Still, not everyone is spending. The amount households have in bank deposits, savings bonds, fixed-income mutual-funds and municipal securities increased $500 billion last year, equaling the most since 2007, according to FTN Financial, based on Fed data, while net household debtincreased $10 billion, the least since 2005.
“You might qualify for a home equity loan, but still have concerns about the economy or job security,” said Icon Advisory’s Richardson. “Or, you might be in that large group of people who need prices to come back a lot more before they qualify.”

Fed Buying

Fed policy makers for four years have driven down fixed home-loan rates by purchasing mortgage-backed bonds to stimulate demand. Last week, the central bank said it would continue to buy securities at a pace of $85 billion a month in their third round of so-called quantitative easing.
At the end of 2012, the average rate for a 30-year fixed primary mortgage fell to an all-time low of 3.3 percent, according to home-loan financier Freddie Mac in McLean, Virginia. Falling rates helped to boost home sales to 4.7 million last year, a gain of 8.4 percent from 2011.
“When we see some more history of home-price stability and improving employment data, there will be more people thinking about using their equity,” said Focardi, of CEB TowerGroup. “Having equity gives a boost to confidence.”
To contact the reporter on this story: Kathleen M. Howley in Boston atkmhowley@bloomberg.net.