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House flipping is suddenly a hot market for America’s lenders

Christopher Maloney, Adam Tempkin and Shahien Nasiripour, Bloomberg News on

Published in Home and Consumer News

There are few easier ways to make a quick buck in America today than flipping houses. The real-estate market is red hot, profits on flips are at a record high — some $66,000 on average per home — and throngs of HGTV-inspired wannabes have been piling into the business for months.

And now, America’s financiers are too. There are more than 60 banks and other firms financing flippers today, according to AlphaFlow, an investment firm that buys real estate loans from lenders. That’s an increase of almost 50% in a little more than two months.

It was always just a matter of time before lenders set aside their apprehensions and began writing checks to the fix-and-flip crowd again. Memories of the 2007 bust are slowly fading and, more importantly, interest rates on most fixed-income investments are still so paltry in the pandemic that lenders are desperate to get their hands on anything that provides juicy returns, especially when it’s tied to a business that’s booming.

The 7.9% average annual rate on a fix-and-flip loan is more than twice the 3.09% rate that a bank can earn on a 30-year mortgage, and more than double the 3.75% that loans to some of the biggest junk-rated borrowers might pay. Loans to flippers also tend to be short-term, often measured in months rather than years, which is appealing to many lenders when interest rates are rising.

To be clear, it’s not the big Wall Street names that are piling into the business, at least not yet. For now, it’s mostly second-tier regional banks and shadow lenders with names that most Americans never heard of, like Cutter Hill Capital, Builders Capital, and Temple View Capital.

Still, they’re collectively plowing so much cash into the market that it’s taken some house-flipping veterans by surprise. John Piazza, a contractor who specializes in rehabbing homes around Wilmington, Delaware, said that never in his four decades in the business had he seen as many cash-flush competitors as he does today.

 

“Banks are just throwing money at you,” Piazza said.

None of this is cause for panic about another looming housing bust. Experts say we’re far from that possibility at this point. Still, they do worry that this influx of fresh cash will only add froth to a go-go market — akin to the way that rock-bottom rates have buoyed financial assets — and further drive up prices on homes that are already out of the reach of many struggling Americans.

“The issue is the element of speculation, when prices go up because that’s what people expect,” said Benjamin Keys, an associate professor of real estate at the University of Pennsylvania’s Wharton School. “Some of that becomes a self-fulfilling prophecy when a lot of money is invested.”

Flippers are profiting from city dwellers who are fleeing urban pandemic life and looking to buy homes in the suburbs. There just aren’t that many to purchase — the inventory of existing homes for sale is at its lowest since at least 1999.

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