Home-Flippers Take Breather Even as Mortgage Rates Decline

NEW YORK (TheStreet) — With 30-year mortgage rates at a 2014 low of 4.25%, late summer buyers may want to step in now and buy a home while the deal makes more sense for their household budget.

But there's one group showing less and less interest in buying residential properties: so-called "home flippers" — investors and speculators who rush into real estate deals, buy up properties and fix them up to sell at a (hopefully) quick profit. Loosely defined, home flippers buy and sell a home within a year.

The numbers show a definite slowdown in home flipping. According to RealtyTrac and its Home Flipping Report, only 31,000 U.S. single-family homes were flipped in the second quarter of 2014. That's 4.6% of all U.S. home sales, down from 6.2% in the second quarter of 2013.

Part of the problem is that flippers' return on investment is slipping. According to RealtyTrac, gross profit margins for home flips stands at $46,000, or a 21% return on investment. But that is down roughly a third from the second quarter of last year, when home flippers earned 31%.

Yet just like homeowners who have had to learn a new normal in which home values grow at a slower pace than before the Great Recession, home flippers may have to settle for weaker profits on property deals.

"Home flipping is settling back into a more historically normal pattern after a flurry of flipping during the recent run-up in home prices in 2012 and 2013," says Daren Blomquist, vice president at RealtyTrac. "Flippers no longer have the luxury of 20% to 30% annual price gains to pad their profits. As the market softens, successful flippers will need to focus on finding properties that they can buy at a discount and efficiently add value to."

Despite the slowdown, there are some U.S. metro areas that still fare well with investment-only home sales. RealtyTrac reports that Pittsburgh (with a 106% rate of return on home sales deals in Q2, 2014), New Orleans, Baltimore, Virginia Beach and Daytona Beach all have home flipping profit margins of over 50%.

But home flippers are largely taking a breather as the residential property summer sales season draws to a close. Whether they return is anyone's guess, but industry professionals would likely view any extended break as a negative to the nation's real estate market.

After all, if the investors don't see a big profit from the housing market, maybe some Main Street buyers feel the same way — even as mortgage rates continue to fall.

More from Personal Finance

Are Starter Homes Still Worth It?

Are Starter Homes Still Worth It?

How to Wire Money Safely, Affordably and Quickly

How to Wire Money Safely, Affordably and Quickly

Should You Take a Mini-Retirement?

Should You Take a Mini-Retirement?

The Most Expensive Places for Families to live in the U.S.

The Most Expensive Places for Families to live in the U.S.

Best Ways to Save for Retirement - Even When You're Living Paycheck to Paycheck

Best Ways to Save for Retirement - Even When You're Living Paycheck to Paycheck