Thursday, August 14, 2008

Where Have All The House Flippers Gone?

Like the old Peter, Paul, and Mary song, house flippers have... "Gone to graveyards, everyone." From the mid-1990's to 2007, the housing boom made many people rich. They could get no money down loans (sometimes for more than 100% of the value of the house) and watch as those properties rose as much as 1 or 2 percent or more per month. Quick buys and sells (flips) were the name of the game.

I live in Las Vegas. Many who live here moved from California and were able to sell their half million dollar homes and buy a near-similar sized or even larger Vegas home for under two hundred thousand dollars. They would take their one-time capital gains exclusion on their California home sale and bank two or three hundred thousand dollars and use that as seed money to flip houses. That's one of the reasons why this town, like places in Florida, have seen a fall in housing prices of nearly 30 percent in the last year. Simply speaking, there are more houses in Las Vegas than people to occupy them.

The days where there are cheap loans and fast appreciating properties are over. The days when the casual and uniformed house flippers can make huge profits are also over. As a result of the sub-prime home loan debacle, all credit is tight. Even for home equity loans and car loans. If you want a loan for real estate, you are going to have to come up with 10 or 20 percent down. Most lenders will go back to the 25% rule. That rule said that your housing expense can't be greater than 25% of you total income. Further, the applicants hare going to have to prove a stable job with years of service. Of course, with housing prices continuing to fall, no one is really going to make a single dollar on a real estate property by carrying a loan.

In the future, the real estate market will effectively be a "dead" money market; except in some yet-unknown hot markets to come. The people who are able to make money in this market will be those who absolutely know the real estate business and who have the capital available to buy and sell without begging for cash from a bank or other lender. Home prices (if they rise at all) will probably rise at a rate that is equal to or below inflation. No more 20% gains per year. It will probably take as many as 10 years or more for your existing home to get to equal the value that it had previously been at the end of 2006. Additional foreclosures, this year and next, will continue to drive inventories up and homes prices down. Don't expect those "House Flipping" shows on cable TV and satellite TV to survive much longer; either.

The consequence of excess is always a diet. Just like someone who overeats, American real estate is on a diet!

Image by 's photostream on Flickr with Creative Commons Licensing remix/adapt/modify permission (Click to View Other Works). Specifically modified by Cranky George for this blog entry.

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