Flipping HousesA post today at Business Insider explains how California’s house-flipping pastime has taken on unprecedented dimensions:

The rate of flipping activity in California hit an all-time high in February and remains well above pre-recession levels. In May, Southern California’s rate hit 5.9%, the Bay Area notched 4.1% and the state averaged 5.3%. The boom peak for all three was about 4.3%, reached in January 2005.

“Flipping” is defined here as selling a house within six months of its most recent sale — neither a new term nor a new practice in the world of real estate investing. But the DataQuick analyst who sent the information along offers a curious explanation for the flipping boom:

Investor purchases are at or near record levels — there’s just a lot more investment activity. What we didn’t have back in the boom times was heavily discounted foreclosed properties… That’s what these flippers have been feeding on.

Investment activity is indeed high, but it’s not because of “heavily discounted foreclosed properties.” I read this phrase from time to time, and I wonder who these agents are who take anything less than market value for their clients in such a torrid, low-inventory field. In fact, according to another report released last month, foreclosure inventory itself is down nearly 25% nationwide from this time last year — and down 50% year-to-year in California. This has further tightened the number of available properties for investors and owner-occupants alike. Some foreclosures, like those I sell for HUD, actually prohibit offers from investors in the first 30 days on the market.

The implied takeaway from DataQuick — that investor-fueled flipping is inflating values — suggests a new housing bubble that we’ve already established has a ways to go before materializing, if it materializes at all.

A likelier scenario involves a core of investors with a distinct and proven advantage over many potential owner-occupants and/or first-time homebuyers: Cash. Even on the auction house steps or in the instance of a foreclosure listed below market value, it takes cash — and flexibility with cash — to keep a competitive edge. The surge in flipped sales reflects these specific transactions, followed within six months by sales in a hot market where values continue to climb.

Why should this distinction matter? Because investing and “flipping” homes didn’t create a bubble on their own eight years ago, and the conditions aren’t even the same today for these practices to risk doing so now. Sometimes we just need to take a deep breath and focus on reality.

Filed under: Ask Warren