Buying, fixing and flipping homes has become a harder — and riskier — investment in California.
Profit margins declined in eight of the nine major regions of the state – including a 41% drop in San Francisco – during the second quarter compared to a year ago, according to ATTOM Data.
Higher mortgage rates, now above 7% as of Sept. 20, are hurting buyers and flippers, many investing tens of thousands of dollars or more freshening up outdated homes (the average flipped home in California was built in 1968).
HOME FLIPPING FLOUNDERS
Like the overall housing market, the home–flipping market has hit hard times. Flipped home sales declined to 6,283 during the quarter, a 13% drop compared to a year ago – and far from the record of 15,322 homes in second-quarter 2005.
And past profit margins of 50%-plus for flipped homes have tumbled to around 25% during the past few quarters in California.
The Central Valley – Bakersfield to Sacramento – has become the home-flipping leader, at least regarding percentage returns. Bakersfield and Fresno flippers enjoyed 40%-plus returns on their investment during the second quarter, while Sacramento flippers had a 34% profit.
The four-county Sacramento area was the only region where the return on investment increased in the second quarter compared to a year ago at 7.1%. Sacramento-area flippers benefit from being one of the most affordable markets in the state coupled with a severe shortage of homes available.
BIG PAYDAYS, SMALLER PROFITS
Now, home flippers in California are still making money – in some cases, a lot of money – but those returns are slipping.
Four of the five biggest paydays (as in money in pockets) were in California, with home flippers in San Jose enjoying a $289,000 profit, about $110,000 more than second-place San Francisco (see table, below).
But on a percentage basis, home flippers in San Francisco and San Jose had profit margins of 15% and 25%, respectively. Far from their 56% and 31% returns just a year ago – and below the national average for the just-completed quarter.
Keep in mind, ATTOM only calculates the purchase and sale price to determine the profit margin, excluding renovation costs, homeowners’ insurance, property tax and even interest if a loan is involved.
‘MAY NOT BE SUBSTANTIAL ENOUGH TO COVER THE HOLDING COSTS’
Do the math: The home-flipping craze is a bit in a haze, at least in California.
Nationwide, the average home flipper had a 27.5% return on investment, compared to the peak of 61% in second-quarter 2021. The average American flipper had a $66,000 profit – a $10,000 increase from the previous quarter.
“Fortunes for investors who flip homes for quick profits are showing more signs of turning around after a long and unusual period when they went down while the rest of the market went up,” says ATTOM CEO Rob Barber. “However, the latest investment returns may not be substantial enough to cover the holding costs on typical deals.”
Just ask many home flippers in California.
8 of 9 regions had home flipping profits drop in the second quarter
| City | Profit (purchase vs. sales price) | Q2 % return on investment (ROI) | % profit vs. a year ago |
|---|---|---|---|
| Bakersfield | $92,000 | 46.5% | -13.0% |
| Fresno | $105,000 | 42.0% | -5.9% |
| Los Angeles | $119,250 | 16.3% | -5.5% |
| Orange County | $147,500 | 16.4% | -2.4% |
| Riverside | $74,500 | 15.3% | -11.5% |
| Sacramento | $120,000 | 34.3% | +7.1% |
| San Diego | $166,500 | 24.1% | -6.6% |
| San Francisco | $185,000 | 14.4% | -41.2% |
| San Jose | $298,250 | 24.9% | -6.5% |
Source: ATTOM Data
Build it, and the homebuyers will come
New-home construction has become a much larger piece of the housing puzzle in recent months, as a large majority of homeowners are staying put with their near-record-low mortgage rates and tiny by comparison monthly payments.
Almost one of every three (31%) homes available to buy nationwide were new construction during the second quarter, a record for the three-month period, according to industry tracker Redfin.
Fast-growing markets like El Paso, Omaha and Raleigh, N.C., had the largest percentage of new homes listed at 40% or more.
But even in California, where approvals for subdivisions can take several years, new-home construction is helping meet the housing demands of some buyers.
A BUILDING BOOM, AT LEAST FOR CALIFORNIA
New-home construction has almost doubled in a handful of markets in the state, including Oakland and in the Sacramento region. But the overall percentage of new-home construction in the market remains relatively low, from about 3% in San Diego to more than 16% in Stockton.
The state added about 123,000 homes in 2022, an almost 1% increase from the year earlier, the largest increase since the Great Recession, according to the California Department of Finance.
The housing boom has continued this year, especially in more affordable housing markets such as the Central Valley and the Inland Empire.
But California’s boom is a blip on the radar for most markets nationwide, especially in fast-growing states like Idaho, Texas and Utah.
With California’s environmental requirements and hefty fees, new-home construction will continue to play a significant but smaller role than in other states.
California needs at least 2.5 million more homes built in the next few years in order to meet the needs of residents, according to industry experts.
New-home sales help tight market
| City | % of listings are new homes |
|---|---|
| Anaheim | 4.7% |
| Bakersfield | 9.7% |
| Fresno | 14.4% |
| Los Angeles | 5.9% |
| Oakland | 6.3% |
| Riverside | 9.5% |
| Sacramento | 12.4% |
| San Diego | 3.3% |
| San Francisco | 7.0% |
| San Jose | 9.6% |
| Stockton | 16.3% |
Source: Redfin
California has the third-largest equity drop in U.S.
Homeowners in western states endured the largest decline in equity during the third quarter, as higher mortgage rates and a severe shortage of homes for sale are major hurdles for a staggering market.
California homeowners had the third-largest equity drop at $48,000 for the period compared to a year ago, behind only the $54,000 tumble in Washington state and $51,000 in Utah, once one of the hottest housing markets.
Nevada and Utah homeowners lost $41,000 in equity, while Arizonans suffered a $37,000 drop, according to industry tracker CoreLogic.
“While U.S. home equity is now lower than its peak in the second quarter of 2022, owners are in a better position than they were six months ago, when prices bottomed out,” says Selma Hepp, chief economist for CoreLogic.
And homeowners in the West can boast the highest home prices – and likely profit the most when selling.
However, San Francisco homeowners’ equity dropped $139,000, the most in the U.S. But even with such a big decline, fewer than one of every 100 homeowners in the City by the Bay has an underwater mortgage – basically owe more than the current value of their home. Los Angeles also has a 0.8% negative equity rate, one of the lowest in the nation.
High-end housing in the mix at Valencia Town Center
Meet me at home, at the mall.
Centennial’s $199 million deal for Valencia Town Center in Santa Clarita could pave the way for luxury living such as high-end apartments or townhomes on the 60-acre property in one of the largest and most successful master-planned communities in California.
The Dallas-based company completed the deal for the 1 million-square-foot mall on Sept. 1 and quickly shared some possibilities for the Valencia Town Center. The deal includes The Patios, a collection of restaurants and shops between the mall and McBean Parkway.
“While it is too soon to announce any definitive plans, Valencia Town Center is in the perfect location to become a multi-use live-work-play destination that seamlessly and aesthetically combines retail, restaurants, entertainment, luxury living and office space in a single master-planned campus,” says Carl Tash, chief investment officer and senior executive vice president of Centennial.
COMMUNITY SHARED IDEAS FOR THE MALL
When former mall owner Unibail-Rodamco-Westfield defaulted on a $195 million loan for the property, the city of Santa Clarita – often referred to as Valencia – asked residents to share their ideas for Valencia Town Center.
The three-decades-old mall is one of the largest in northern Los Angeles County and has plenty of open space. And under two new laws that went into effect July 1, developers can easily convert land zoned for commercial use into housing.
“We are committed to this shopping center and to the Santa Clarita community for the long haul, and with some creativity, we can reimagine this center, maximizing its potential for today and tomorrow,” says Steven Levin, founder and CEO of Centennial.
