With inflation at a seven-year high and home prices continuing to skyrocket, profit margins for smaller real estate investors have dwindled down to razor-thin levels.
Traditional Homebuyers Aren’t Alone in Struggle to Score in Housing Market
According to a year-end analysis by RealtyTrac, smaller real estate investors, home flippers and traditional homebuyers share concerns about the housing market being “worse” or “much worse” than a year ago.
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RealtyTrac’s analysis indicates that nearly one in two independent investors are worried that high inflation and high home prices are making it less likely to generate a decent return on investment, ROI, when weighing substantial risks.
Profit Margins Dropped in Nearly 50% of Metro Areas
Even as home flipping activity continues to rise, home flipping margins continue to drop across the US, according to ATTOM’s Q3 2021 US Home Flipping Report.
Profit margins for home flipping fell to their lowest point, just a 32.3% ROI, since early 2011. The decrease in the typical profit margin from Q3 2020 to Q3 2021 was the largest annual drop in ROI since early 2009 when the housing market crashed from effects of the Great Recession.
According to Todd Teta, chief product officer with ATTOM, said, “One key factor could be a recent increase in renovation costs during a period when the US inflation rate has jumped to a 40-year high.”
Places with Largest Profit Margins
- Buffalo NY – +130.6%
- Oklahoma City OK – +127.6%
- Florence SC – +125.8%
- Pittsburgh PA – +124.6%
- Scranton PA – +123.2%
Places with Smallest Profit Margins
- Laredo TX – +7.5%
- Boise ID – +8%
- Gulfport MS – +8.4%
- Lubbock TX – +10%
- Portland OR – +10.1%
Tradition Homebuyers, Traditional Home Flippers, Investors & iBuyers Competing Against Each Other
In February 2022, Redfin indicated that investors were buying more than ever, scoping up a record 18.4% of all homes sold in Q4 2021. (Likely, this Redfin data included both investors and iBuyers.)
However, Zillow’s Q4 2021 iBuyer Report indicated that iBuyers purchased 70,402 homes in 2021, “…more than double the previous annual high of 32,726 homes in 2019.” Also, iBuyers, backed by millions of dollars from both foreign and domestic institutional investors, entered dozens of new markets last year…this fact alone made it more difficult than ever for smaller real estate investors, home-flippers and traditional homebuyers to compete.
Amid a record-low shortage of homes for sale. everyone is competing against everyone. Rick Sharga, executive vice president of RealtyTrac, said, “Individual investors continue to cite traditional consumer homebuyers as a bigger problem when it comes to competing for homes than institutional investors.”
Room for Optimism for Everyone
The record-low level of foreclosures, according to another report from ATTOM, has nowhere to go but up.
RealtyTrac indicates “…An increase in foreclosure activity could provide more affordable inventory for investors (traditional homebuyers, home flippers and iBuyers), offsetting some of inflation’s rising costs. Nearly 43% of investors think that foreclosure activity will rise to higher than normal rates, but stay below the level seen during the Great Recession.”
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Thanks to Inman, RealtyTrac, Zillow and ATTOM.
