Predictions about the maturity of the current housing market and the potential effects on the flipping and private lending industries abound. Some experts cite statistics on continued housing price increases as well as these prices relative to income growth as cautionary signs. Others point to more positive barometers: The number of days on market for houses in most cities isn’t increasing, and unsold inventory isn’t piling up.

The reality is that no one has a crystal ball. Still, analyzing the wealth of current data we have can provide us with some clues about where we are in the cycle and how to get the most out of the current market.

Interpreting the Data
 The ATTOM Data Solutions first quarter 2018 report released on June 6 contained some interesting and seemingly contradictory statistics. Flipping gross profit for first quarter 2018 was $69,500, the highest since ATTOM started tracking this data in first quarter 2000. Yet the average 47.8 percent return on investment of these same flips is down to a nearly three-year low.  Highest profits in a decade, yet falling ROIs?

“The 2018 housing market is a double-edged sword for home flippers,” says Daren Blomquist, ATTOM’s senior vice president. “Rapidly rising home prices boosted by low available inventory of homes for sale or rent are padding profits at the back end when flippers sell, but those same market realities are eroding flipping returns at the front end by forcing flippers to pay more to acquire homes to flip.”

Core urban areas with large populations and stable job markets, where “after renovation” prices remain high, are understandably and consistently popular with flippers. But flippers are finding that these are increasingly more competitive and expensive areas to buy distressed properties, which squeezes their profit margin. And the sheer numbers of flips in these markets with these reduced ROIs affect the national ROI averages. But the lower ROIs being realized by some flippers can also be interpreted as a sign of a healthier market, one with so much end-user demand that more and more competitors are looking to buy and flip the same properties.

How does this affect the private lending space? Generally, properties with higher purchase prices are harder for flippers to finance on their own. This can translate into more demand for capital from private lenders. In fact, the percent of flips reportedly financed for the initial buy was 35.7 percent in first quarter 2018, 2 percent more than a year ago and a 9 1/2-year high. Some MSAs have even higher rates. In Greater Washington, D.C., for example, 44 percent of flips are financed, nearly 9 percent above the national average.

The housing shortage is the greatest supply shortage in 60 years, partially because millennials are finally buying. For the second year in a row, millennials have been the largest group of home buyers in the nation, purchasing nearly 1 in 3 homes sold each year. And numerous studies show us that millennials want to buy homes that are “move-in” ready, though they aren’t the only ones. Buyers from all age groups tell real estate agents that they are looking for “turnkey” properties that require little to no repairs or improvements. All of this bodes well for the fix and flip industry, which creates exactly those types of properties that buyers are looking for, across many price points.

Housing and job markets are resoundingly regional, as is the fix and flip industry. Metropolitan Washington, D.C., for example, has been a hot flipping market for many years running, because it has the elements critical to fix and flip success: a high density of homes, a stable job market and a strong local economy. Local Market Monitor, an organization that tracks more than 300 MSAs, counties and Zip codes, collects and analyzes regional data such as home prices versus income, future construction needs and business growth reports. This data is used to help them predict, among other things, the medium-growth and high-growth areas across the country.

Using Data for Strategic Expansion
So where are the best regions, cities and Zip codes in the country to renovate homes and fund those renovations? ATTOM Data Solutions’ quarterly and annual reports are a great place to start for identifying and analyzing everything from the volume of flips, flipper profits, ROIs, percent of flippers who use financing and even age of housing stock. When you overlay their data with other metrics such as jobs growth and housing affordability data, you get an even a clearer picture of potential markets for strategic expansion. Here are a few other metrics to consider.

01 – Percentage increase in population with a bachelor’s degree or better.

College-educated buyers have the salaries to afford the trade-up flips. And those with a  bachelor’s degree or better have higher homeownership rates than those with only a high school degree. So, the more of them there are in a target market, the better.

02 – Increasing median household income.

In areas where good jobs are being added and the economy is expanding, median household income typically rises. This is a tricky metric because you can’t look at the raw data in isolation. Memphis may be a top flip market in the country right now, but an upper-middle-class income there won’t buy even an entry-level home in San Francisco.

03 – Housing affordability.

This metric, calculated by the National Association of Realtors, measures how much of the population in an MSA can buy the median-priced home. Looking at changes tells you how income and housing prices are moving in local markets. Rising home prices backed by rising income is a positive sign. Rising home prices accompanied by falling or stable incomes is more of a warning sign.

04 – Days on market.

The percentage of homes selling in 10, 30, 60 or 90 days is a good news/bad news kind of metric. In a hot market, a flipped home will sell quickly, but it’s also harder to acquire homes to flip because properties sell so fast. On the other side, a market where it’s taking 90 days to move most homes is probably not desirable.

05 – The delta between as-is and improved trades.

This measure is difficult to pin down because so many indices track bought and sold prices without capturing what the flipper had to put into the deal. Knowing you bought at $300,000 and sold at $600,000 tells me little unless I know you only had to spend $100,000 to get the property to market.

A good expansion market has neighborhoods on the cusp of gentrification where you can still find good buys. The best expansion markets have up-and-coming neighborhoods where you can ride a bike to work.

06 – How tight are zoning restrictions? Is the permit process reasonably fast?

Flipping a dozen homes in Houston can be easier than flipping a single home in San Francisco. Expansion into a development-friendly county or city is always easier than expansion into a heavily regulated housing market. When you consider entering a market known for being tough on renovators, be sure you can accurately price the cost of delays (and have permit expeditors on speed dial).

07 – Is the market already saturated with private lenders?

The more competition you have, the more likely it is that margins are compressed. If you have to borrow at 8.5 percent, then lending in Los Angeles, where fierce competition has driven private money into the 8’s, is obviously not a good option.

08 – Do I have reliable partners on the ground?

Private lending requires loan-level supervision to ensure borrowers are on track with renovations, but we would never limit ourselves to only contiguous markets. Where we don’t have local talent, we partner with national inspector and appraiser groups. What is necessary is having someone local doing business development. Caveat: Others would argue that volume, artificial intelligence and a large loan loss reserve fund can replace local eyes.

09 – Other factors.

In addition to the metrics listed above, there are a number of other factors to consider when researching new markets. Among these are a rising local economy, quality of life, competition from new multifamily and single-family development, remodeling costs, stock of distressed properties and stock of improved properties.

We still see significant runway ahead in the fix and flip space. Consistent job growth, the housing  shortage, record returns for flippers and higher rates of financing fix and flips are all positive signs. Because private lenders operate primarily in the space of residential properties with a short shelf life and frequent property churn, we can also protect ourselves from long-term loan exposure. And by using the available data to strategically choose what regions to focus on, we can protect ourselves further while expanding.