Marty Boardman was sitting in his home office in August 2007 when he realized his life would never be the same.
As a beginner real estate investor and real estate swimmer, Boardman had taken advantage of the US housing bubble to build a small real estate “empire” after quitting his job as a television cameraman.
But after house prices spiked in early 2006, the real estate market became increasingly hostile to investors. And, eventually, the housing bubble burst, leaving pinball machines like Boardman dry and triggering a global financial crisis.
“I’ll never forget it. The music had stopped and I didn’t have a chair,” he said Fortune.
Boardman has since rebuilt his business, diversified geographically and started offering advice to other home-based fin enthusiasts on how to use foreclosures to generate profits.
But now he and other veteran pinball machines and housing analysts are warning that a new generation of newbie pinball machines could be in trouble as mortgage rates soar and the housing market enters what the Fed Chairman , Jerome Powell, calls it a “difficult correction”. Economists and analysts have also repeatedly cut their home price forecasts this year. Moody’s Analytics, for example, now expects a 10% decline from peak to trough in national home prices.
The economics of flipping is simple: Flippers profit when they sell their “flip” above their combined cost to secure the house and renovate it. While flippers add economic value by renovating homes, during periods of strong house price growth, it is often home appreciation that is their greatest source of profit. Conversely, if house prices start to fall, pinball machines can easily see their “flip” pushed into the red. Simply put: It’s easy to see why the changing housing market doesn’t bode well for home swimmers.
Bruce Bartlett, a seasoned real estate investor and home flipper with more than 20 years of experience in the industry, fears the coming home price correction will “cull the herd” of inexperienced flippers entering the market. over the past few years amid the rise of HGTV’s home flip shows.
“All is not rosy. If you are inexperienced, it will be very difficult,” he said. Fortune. “For the past 15 years, we have been in a low interest rate environment, and it will be difficult for everyone to recalculate. It will slaughter the herd. Lesser fins will leave the company.
Home palms retreat
With rising mortgage rates and rising labor costs, it is becoming more and more expensive to flip a house. Add to that falling real estate prices and low inventory, and it becomes a toxic situation for even the most seasoned pinball machine.
As a result, many of the industry’s most seasoned players are becoming more and more conservative.
“For the fins, I think we are all cautious. We are currently seeing price reductions. We therefore factor into our model the possibility of further price corrections. Bartlett said, noting that predicting potential selling prices for homes after rehabilitation has become a challenge in recent months.
Bartlett gave the example of a bigger house he is looking to return to in Beverly Hills. Higher-value homes generally take longer to renovate and sell, so Bartlett was trying to predict where prices would be in the area three years from now.
“We’re very aware that we won’t be able to nail down that estimate,” Bartlett said. “So we better give ourselves a lot of leeway.”
Shortly after the pandemic real estate boom took off, amateur and professional palmists flocked to the market. The opportunity to rack up record levels of appreciation while they changed homes was just too good a deal to pass up. In fact, house flips during the pandemic have reached levels not seen since last year’s housing boom.
While it will take time to show up in the data (see chart above), this home flip boom has already started to pull back.
Daren Blomquist, vice president of market economics at Auction.com, the nation’s largest seller of residential bank-owned and foreclosure properties, said Fortune that he has seen evidence of this more conservative approach to fins in the drastic change in buyer behavior on his platform over the past six months, where 60% of buyers are home-based fins.
“We certainly find that our bidders are much more conservative,” says Blomquist.
A worrying prospect – some pinball machines could suffer big losses
To be clear, most local pinball machines and analysts Fortune spoke with thinks the current domestic fin market isn’t as bad as it was in 2007. That said, they think choppy waters lie ahead.
Auction.com’s Blomquist said he’s seen an increase in the number of smaller home pinball machines on his platform over the past few years and that if pinball machines continue to be “too speculative” in the current difficult market, there would certainly be “spillovers”.
“It’s a potential catch-a-knife type environment that they’re going to resell in the next three to six months,” he said.
The markets where pinball machines are most at risk of big losses? Booming cities.
Just like in 2007, the fastest pullbacks are happening in the very places where reversals rose the most during the housing boom. Look no further than Phoenix. The number of returned homes in Phoenix has already fallen 60% since March, according to data provided to NBC’s Phoenix local news affiliate by The Cromford Report. The reason is simple: many Phoenix swimmers are holding back new purchases in the face of the rapidly changing Phoenix real estate market.
“The places that have exploded the most will be the ones with the worst pinball machines,” said HousingWire principal analyst Logan Mohtashami. “Boise, Phoenix, those types of areas are the red alert of stage one, danger, danger for the fins because those are the areas that actually have supply, whereas in other parts of the country , we just don’t see that.”
On the one hand, it’s positive that industry insiders don’t expect 2022 or 2023 fins to end up selling in a supply glut or a 2008-style foreclosure crisis. on the other hand, it means that developments in the housing market are unlikely to bring about the head-turning deals that the last housing downturn brought.
Not only have 2008-era distressed sales created opportunities for rehabilitation, but the real estate downturn has also seen less competition reversed. The amateurs left and the pros, who were able to buy houses at very advantageous prices, feasted.
“It’s a much more problematic environment today than it was when credit crashed in 2005, 2006, 2007 and 2008, and the job loss recession happened. . Because for the next few years you had distressed assets entering the system in bulk. So it was like a heavenly time for fins,” Mohtashami said. “But here [in 2022 and 2023]it’s very different.