Americans still think they can make money flipping houses

https://www.cbsnews.com/news/homeownership-not-the-wealth-builder-many-americans-think-it-is/

by prostoalex • 4 years ago

87 187 4 years ago

It's not just the up keep. House prices are dropping fast. What seemed like a hot market just 6 months ago, it is not a Luke-warm one.

nxm4• 4 years ago

They are not dropping fast. Perhaps a $5-20k cut in some regions, but in others they are still appreciating albeit by a smaller amount than in previous years. Too much money and not enough housing to lower prices

Waterluvian2• 4 years ago

Is real estate in the US one of those industries where corner cutters think, “oh that’s an easy career” ?

My Instagram timeline has become filled, for some reason, with local (not to me) agents insisting that there is no bubble and now is the time to buy. And they’re all really unprofessional looking and sounding and seem to be worried about one thing: their business.

nine_zeros• 4 years ago

A lot of people in America is looking for a quick buck. Real estate flipping was very successful in the last decade with cheap money. There are entire TV channels ( yes, channels, not shows) showing flipping and renovation in various ways.

Many Americans are so tired of the rat race that they are lured by the glory of being able to get off the treadmill and riding off to the sunset. Bubble economies help fuel that dream

dwater• 4 years ago

It’s a magnet for people who want to make a lot more money than they are qualified to get through salaried positions. You don’t need education, specialized skills, credentials, status, or connections to succeed. But you do have to be savvy because it’s a very complex business with many pitfalls. So it attracts people with few other opportunities for success, and a typical trajectory I’ve seen multiple times is they get successful quickly in a rapidly rising market, overextend and over leverage themselves, start cutting corners and committing small fraud to keep the gravy train rolling, and then lose control and collapse spectacularly when circumstances go against them (due to a softening market, failing marriage, substance abuse, etc).

samsolomon• 4 years ago

The people who host those shows are extremely good. They are excellent designers or builders and have connections to specialists for landscaping, architecture or whatever area they are deficient in. Not only that, but they know how to market themselves.They have an HGTV show because they were able to get the word out about their work.

The other part of that is that I don't think most realize how much work something like that takes—it basically is a full-time job. I've got an endless list of projects for my own home and I'm not doing anything close to knocking down walls or updating the kitchen.

chiph• 4 years ago

To a real estate agent, it's always the perfect time to buy. Market is up? "Buy before prices rise!" Market is down? "Buy while prices are low!"

There are training classes you can take to get your agent's license, so entering the field is pretty straightforward. There are usually a lot of part-time agents who make enough off each sale to justify staying in the field. And a very few who have worked their way up to selling high-dollar properties and make quite a lot of money. It's customary for a sale to have 6% realtor fees, split between the selling and buying agents. So the more a house sells for, the more they make. A falling market will drive some agents out of the field.

jaclaz5• 4 years ago

So the more a house sells for, the more they make. A falling market will drive some agents out of the field.

Yes and no.

This was a chapter in Freakonomics which showed how since their fee is a small fraction of the value, changes in prices would not affect them so much (within limits), i.e. the 3% fee on - say - 1,000,000 is 30,000, if the house price gets to 900,000 the 3% fee is still 27,000, but in order to be able to sell at the full price, they would need more time and have more expenses, so the real incentive for the agent is to sell quickly and find a new house to sell.

If you prefer, selling 5 houses at 850,000 is still better than selling 4 at 1,000,000 for the agent.

If number of sales go down then the agents will suffer.

snowwrestler• 4 years ago

Real estate is a field where you can succeed on hard work and hustle without much expensive professional education. A good real estate agent in a nice area can make as much as a dentist, but they didn’t have to go to expensive school for years just to get started. The required training is relatively minimal.

There are certainly “corner-cutters” in real estate just like any industry. But to make real estate a sustainable career, it really does take a lot of hard work, hustle, and integrity. Most long-term agents live off of referrals and repeat customers. Or have enormous marketing costs, which also takes skill to manage.

mchusma• 4 years ago

If real estate is to be a good investment, it must become less affordable over time. The idea that real estate in general is a good investment is dangerous to our economy.

The solution to housing is reducing subsidies and removing supply side restrictions. However these are not politically popular in a world where people want housing prices to go up.

saiya-jin• 4 years ago

Yes if everybody should live in their own real estate. There are superbly working economies where this is not true for many decades for various reasons (ie Switzerland) and they do just fine and people are happy, just focus on more important matters in life.

There are many arguments against urban sprawl which is direct consequence of such approach.

nxm4• 4 years ago

Not a fan of comparisons of other countries to one of the most wealthy per capita, homogenous one. Switzerland is an exception and not a rule

pzone• 4 years ago

Removing supply side restrictions can lead to densification instead of sprawl. It just needs to be paired with smart transit policy.

s1artibartfast11• 4 years ago

If real estate is to be a good investment, it must become less affordable over time.

False. Value can increase if gdp increases without changing the %income spent on housing.

If house prices double while salaries double, affordability is the same but dollar value still went up.

robjan• 4 years ago

In that scenario the value is going up relative to the currency the property was purchased in but that's because the value of the currency is diminished.

ip262• 4 years ago

The idea that even as a locale becomes more desirable it should remain just as affordable is dangerous to our economy.

thatguy0900• 4 years ago

Are people comaining that it isn't just as affordable, or that it's not even affordable in the slightest?

bluGill2• 4 years ago

You can make money flipping houses. However it becomes a job and you need to treat it like one. You have to invest in the right house, a house that only needs paint and it will sell for a thousand profit vs a house that needs to have the main beams replaced to get $50000 profit. The above numbers are real required profit because of the risk you are taking, and also the time that you own the house paying intrest waiting for the next buyers to take over. There is a different type of flipper who gets into each of the above, getting the wrong house will break you. Either way you need enough houses in progress to always be working, and there are so many houses in any city to work with.

Yes you can make money, but that doesn't mean you will. It is a complex job and not for everyone.

SamuelAdams• 4 years ago

What’s interesting is that this article seems to insinuate flippers as holding onto houses for 5 years. Then they go on to say the maintenance and mortgage payments eat into the profits.

Well yes, of course that is an issue. But most flippers I’ve seen in my neighborhood only own the property for a max of 3 months. They make cosmetic changes and maybe some core changes (new roof, hvac), then turn around and sell it in less than a week.

Most flippers are not holding onto property for 5 years. That’s just regular people living in houses.

hiptobecubic3• 4 years ago

This kind of extremely risky approach to earning money, where one mistake ruins you, is colloquially referred to as "gambling."

bluGill2• 4 years ago

I.know someone who has been doing it for decades. Some houses lose money, but most make money and he always has several in progress. Realtors call him when they see a house that won't sell fast.

auganov• 4 years ago

If you invest a lot of effort and expertise on the renovation side you can remove most of the risk. It's like getting into the contracting business but you get to pick your own jobs. IMO it's one of these under-saturated things that most smart people just don't want to do.

pmorici• 4 years ago

Housing is unique in that it is one of the few, maybe the only, assets where leverage in the form of a loan is relatively easily available to even people without a lot of assets. Where as other forms of leverage like margin loans require the borrower to already have assets for collateral. To buy a house you basically just need a reasonable job and a few thousand for the down payment.

lotsofpulp7• 4 years ago

Because taxpayers subsidize it by accepting looser underwriting standards.

alphabettsy• 4 years ago

It’s subsidized regardless. There are countless tax incentives for homeowners.

s1artibartfast11• 4 years ago

Is it really subsidized tho if there is no cost to do so and no loss incurred on the lender and government?

hardwaresofton• 4 years ago

This isn’t 2008, at this point I think people are underestimating the speculative home buyer. The people who are buying houses now are more likely people looking to build rental income cash cows.

In a world where productivity is somewhat slowing after massive growth, people are taking to rent seeking activity and the disincentives aren’t there to encourage productive behavior.

Why buy and sell when you can buy, charge rent, and pass down to your kids?

Victerius• 4 years ago

Eventually, people just move away. US states with a high cost of living have lost millions of residents to low cost of living states during the last 10 years, to the point when California and New York are about to lose an electoral college seat each. And, yes, California and New York landlords are partially responsible for that for the reasons mentioned above.

The financial industry is moving away from the northeast to the south, primarily Florida, Texas, and the Carolinas.

High rents, taxes, and property prices make people and businesses run away.

nxm4• 4 years ago

Property taxes,income taxes, fuel taxes, high utilities costs all limit growth of prices in blue states.

civilized3• 4 years ago

So, if houses were to become investments on a massive scale, and -- as seems inevitable -- they ended up in the hands of only a few, does that change the politics of housing supply?

Before, your neighborhood's voters were homeowners who benefit from rising property values; after, they're renters who benefit from falling rents.

I've heard that Germany has more of this renting situation but no idea about the politics of housing supply over there.

taneq• 4 years ago

Are houses not considered an investment where you’re from? Ever hear the term “safe as houses”?

Schiendelman3• 4 years ago

Renters are so much less likely to be voters that this has little impact.

In Seattle, for instance, municipal elections are on odd-numbered years. As a result, get out the vote operations that tend to increase renter turnout during presidential elections don’t have much impact on local elections.

We had a vote in the 90s that reduced housing supply considerably, “Citizens Alternative Plan.” It was a February special election with 23% turnout. 15% of Seattle voters downzoned the city.

iddan• 4 years ago

This is exactly what happened in Israel. Everyone who bought houses have doubled or tripled their investment in three decades.

rdubz• 4 years ago

Is this accounting for inflation?

4% inflation per year (the most common estimate I see in the US) means 3x over 30 years doesn't even break even (1.04**30 ≈ 3.24).

I often wonder how much people obsessed with home prices rising (in the US at least) take this into account. How much housing mania is fueled by people getting excited about gains that aren't as real as they think?

MatthiasPortzel• 4 years ago

This isn’t 2008, at this point I think people are underestimating the speculative home buyer. The people who are buying houses now are more likely people looking to build rental income cash cows.

I agree that most people investing in real estate aren't hoping for the underlying asset to significantly appreciate in value. Real estate pays significant dividends (more than stock), and you can be confident that it will provide a hedge against inflation.

Owning real estate also has a lot of tax advantages over stock (you can write off upkeep expenses and you can do a 1031 exchange, for example).

_the_inflator• 4 years ago

Here are some numbers and statistics: https://www.attomdata.com/news/market-trends/flipping/attom-...

tyjen2• 4 years ago

House price fluctuation is still local market dependent. People who purchased overpriced, new mass developer homes in saturated newer markets may suffer a contraction. Areas with supporting high demand, low inventory, and inability to develop newer properties will maintain increasing valuation, but not at the same rate. A savvy home flipper can still make money, it's just harder to do so with increased competition in that area.

This isn't a repeat of the 2008 financial crisis, in which financial institutions overloaded on mortgage-backed securities fueled by easy access mortgage loans without thorough loan application vetting. The deluge of foreclosures isn't likely to occur and people are likely to hold onto their houses and maintain firmer home prices during this slowdown.

Kon-Peki• 4 years ago

Areas with supporting high demand,

But most people think that this is an accurate description of their local market, and I'm not so sure that it is.

tyjen2• 4 years ago

Most people don't know how to evaluate a market and are more short-sighted than they want to admit to themselves. It's reflected within entrepreneurship too, with ~50 percent failure within 5 years.

Seattle: Severely limited land area mass surrounded by water with robust business sector. Single-family homes will become rarer across time with local pushes to develop multi-family domiciles. And, if you buy waterfront, your security increases substantially.

Colorado Springs: Mountains impede development slightly with large military presence, but you can build suburban developments for as far as the eye can see in most directions.

Prior to a slowdown, people see prices increasing and apply it too strongly to future results. But, one of these areas will be far more insulated from price fluctuations than the other.

m0llusk4• 4 years ago

It is an amazing contrast with the situation when I was younger. House prices were bounded by wages and were understood to be depreciating assets. That is, without constant investment they lost their value and became unusable and difficult to trade. Even in the best of times it takes time, preparation, and fees to sell real estate. Landlording was a rich person's game because of the risk involved and if you really wanted to make money it was expected that any properties to be rented should be fully paid off because of the slim profits and high risk of damage to the property.

The whole idea of fearing loss of value was completely different: Nowadays houses are bidding chips and people want to make the numbers go up to feel rich. In the past sharp losses of value meant the area was no longer desirable so that people were not moving in and so wages would no longer support prices in that area. Either things were modest and relatively stable or unstable and sinking.

The current attitude toward housing is based on the recent explosion of house prices which is driven by financialization, extremely low interest rates, and demand outpacing supply where there are jobs. Economic, political, and demographic changes are very likely to wipe all of that out in a relatively short period.

endisneigh2• 4 years ago

What area are you referring to where housing was understood to be a depreciating asset?

Though that’s true in the literal sense, there are only a handful of instances in American history where they was empirically the case.

Not to mention you don’t specify a locale which is the most important thing in real estate, heck, these days perhaps a neighborhood.

smt882• 4 years ago

In much of the North and Rust Belt of the US, houses declined in real dollars between the heydey of the mid-20th century and now. Detroit is a good example.

m0llusk4• 4 years ago

I am referring to the United States. In my youth I traveled a great deal, especially around the Midwest and Boston-Washington DC corridor and nearby countryside, much of which has since been developed.

If you do a search for long term housing price data you will see that until the burst of inflation in the mid 1970s house prices were mostly flat. There was still inflation and wear, but the prices remained about where they were. In this environment where house prices are flat and houses wear out the asset becomes known for its depreciation.

The big thing about locales is their vulnerability. It really is the case that back then some undesirable people moving in to a community could start a cascade of people moving out. In that case prices went from flat to falling fast. If you really did pick a great locale then your reward was prices remaining flat.

epistasis5• 4 years ago

I think we need to start thinking more clearly about real estate as a combination of two things: structure (depreciating) and land.

Land behaves very different from other assets, because there is a finite amount of it, and it generates economic rent. And the increase in land value generally comes actions not of the owner, but of others, and of the government deciding what is allowed on the land (which happens at the local level, where a small cabal of landowners can exert great influence over a small number of officials making decisions).

And unlike speculation on, say, lumber futures, speculation on land by buying it and hoarding it is actually a huge economic damper. Real estate speculation, by holding a property underdeveloped until it can be sold for maximum profit, creates a land bubble because it withholds productive use of that finite resource that everybody is trying to get.

The best way to solve this would be to, IMHO, tax away all the economic rents that land generates. This removes the speculation, and ensures that every piece of property that is being underutilized will get transferred to someone who can better use it. This will keep housing prices down, because more houses will be built in high demand areas. It's a tax that would greatly improve economic efficiency, housing affordability, and our overall productivity. (It does need to be paired with zoning reform, though).

We also need to reinvigorate our construction sector's productivity, and reduce the shocks to it from the boom bust cycle, but that takes different policy.

qeternity3• 4 years ago

The current attitude toward housing is based on the recent explosion of house prices which is driven by financialization, extremely low interest rates, and demand outpacing supply where there are jobs.

These are the mechanisms by which the housing market has been driven to absurdity. But that reason why were here is that politicians and by extension the electorate on whose behalf they govern, decided to turn housing into a retirement plan. We then created enormous government programs to encourage people to partake in this scheme, which only robbed the future to pay the present. And now that many families have substantial wealth tied up in housing, it will be nearly impossible to voluntarily undo this mess.

nwatson2• 4 years ago

And a big swath of the US population were barred from participating in those programs and so didn't get the benefit of relative inflation.

chrisseaton4• 4 years ago

House prices were bounded by wages and were understood to be depreciating assets.

When was this ever true?

If you literally abandoned a house and let it rot then yeah maybe in ten years it will have lost value because it will need a lot of work, but other than that I think it's never been the case they're depreciating in any meaningful sense.

blululu• 4 years ago

Pretty much every capital asset depreciates. Even with basic maintenance everything wears out over time. Only legal entities are immune from the ravages of time.

m0llusk4• 4 years ago

Take just the roof alone. On a typical house roof replacement is at least a few thousand dollars and for a nice house in an urban area it will cost at least ten thousand and maybe much more. Even with good materials and installation roofs stay in good condition for around 30 years and become completely degraded in around 50. Some napkin math for a common and kind scenario is another $10k roof every 30 years which is $333/year or $27/month just to keep basic structure integrity.

Now add on to that interior details, floor coverings, appliances, and such many of which are lucky to last 10 years and the numbers start to add up.

giaour4• 4 years ago

The overall value of a "house" is the value of the structure plus the value of the land, and it's common for the former to depreciate while the value of the latter increases. Construction costs have gone down over time (adjusting for inflation), and most building materials degrade.

When I was looking for a house in Seattle, many of the $800K bungalows were sold with the expectation that the buyer would level the existing house and build something new. During the same time frame in the rust belt (particularly Detroit) , however, many housing parcels were sold for less than the value of the structure due to the undesirable location of the land.

jlbbellefeuille• 4 years ago

Detroit would like a word with you…

https://tinyurl.com/Detroit-2009-to-2019

mrjin• 4 years ago

There was one obvious reason: too much money was printed, for decades. Virtually unlimited supply of cheap money not only push up asset prices but also make it super easy to blindly take loans to invest in assets and make tones of money. Once you tasted the easy money, you want more and earn from hard working would look super stupid. Properties are the most accessible way of getting involved, so people flock in. It's not only America, it's virtually everywhere.

Look around the globe, for how long have all central banks been doing nothing but printing money? Printing money to economy just like adrenaline injection to body, it for sure helps in some scenarios but it also kills if you don't know when to stop. All the central banks delayed the crisis by printing money and got away by manipulating the data to make CPI looking low. It would be probably okay if they did that only one time or two.

So here we are.

nemo44x6• 4 years ago

Falling interest rates for 40 years wasn’t the problem. If anything there has been less demand for money which is why rates fall. Things are far less capital intensive than they used to be in many cases.

Falling interest rates have been great for people as more people own homes than at any other point in history.

But printing trillions more last year was a flaw. At least got physical proof that MMT doesn’t work.

epistasis5• 4 years ago

Every modern bank loan is "printing money" because there is no amount of corresponding money that the bank is actually loaning out. The bank must survive stress tests, but not have actual deposits on hand for the amount loaned out.

However, even if the bank needed to have deposits or collateral on hand, to stop the "printing money" aspect of new loans, this same thing could happen because homes are collateral on mortgage.

Really I think it mostly driven by the supply demand mismatch, and in particular a belief that local governments will not allow the supply to meet demand.

There's a great recent Fed paper that shows the absolute huge correlation between prices and the supply/demand mismatch. It further shows that demand volatility has been higher than supply volatility so recent effects are explained by that demand volatility.

The only way to solve this is to out build demand and shock prices down. IMHO.

nemo44x6• 4 years ago

In many locales the house is the least valuable thing on the property. When you buy real estate you’re buying a location above all else. As the population has grown and high paying jobs have increasingly consolidated into fewer urban areas, the demand for real estate in those locations has increased.

So it’s the land and location you’re investing in which is certainly not a depreciating asset. Where I live it’s an old town that doesn’t have anymore room to build and way more people want to live here than there could ever be homes. So prices continue their rise even if you invest very little in the home. Saying that, you’re right that owning a house means taking care of it which costs money.

gonzo412• 4 years ago

It's a massive failure of neoliberal economics that this has occurred. Mortgage prices, along with the cost of electricity are two massive handbrakes on economic growth and potential productivity. Yet somehow the banks and power companies have captured the public to make people think that paying a million dollars to the bank is a great way to live. It's just crazy.

ryan93• 4 years ago

You have to get government approval to build. What are you talking about?

epistasis5• 4 years ago

House prices were bounded by wages and were understood to be depreciating assets

The first part is still true. The thing is that it's bounded by a smaller and smaller percentage wages, and it's always the highest wages that determine this.

Housing prices being bound by seller capacity to pay means that there are not enough houses. If housing prices were determined by the cost of the houses, then we would have finally reached the point where there is adequate supply b

inglor_cz• 4 years ago

I sort-of agree and sort-of no. These are my objections:

First of all, we should separate the value of the house from the value of the land, which is determined by its location. In my country, brand new houses in Ostrava (a rust belt city where I was born) cost about half as much as brand new houses around Prague (the capital), even though they are of the same size, on same sized lots, built from the very same materials by the very same Ukrainian gastarbeiters according to the very same technical standards etc.

This isn't just pure gamble, but reflection of the fact that Ostrava isn't particularly attractive for employment even for the natives, while Prague is a major hub attracting professionals from the entire Slavic half of Europe and even some Westerners. An order of magnitude, if not more, people want to move to Prague than to Ostrava. This must have an effect on the land value.

Second, the quality of the house matters. A wooden Japanese-style house depreciates quite fast. A modern brick house built to strict specs will outlast you and your kids, so the material depreciation is much slower. It might even be slower than pure inflation.

Frost1x• 4 years ago

First of all, we should separate the value of the house from the value of the land, which is determined by its location.

I'd say this is fairly true in the US. When you compare houses and the amount of similar quality property of say San Francisco or Austin to rural parts of say... Texas or Wyoming, you're going to find that at the same price point (a reflection of market value estimation), you get a lot more in Wyoming or rural Texas in terms of land and the quality of house than in the metropolitan areas described. When you compare metropolitan areas, housing and property is often significantly more expensive in areas where there is more opportunity for the working class or even businesses.

usrn• 4 years ago

It's all distorted by credit which heavily discourages building new housing.

If I don't get a house this year I'm giving up on using real estate and moving onto my boat. I wish more people would do things like this.

jmyeet3• 4 years ago

This really is a situation that's almost too big to fail. Let me explain.

First, since so many voters are invested in the housing market, it's almost political suicide to do anything about it now. Protection and even increasing property prices has become an explicit political goal on every level.

Second, as you see more and more corporations enter this market and become stakeholders, this trend is only strengthened as corporations are the true constituents. And no it doesn't matter which party is in power. The corporations have bought both of them.

I'd say the biggest difference between now and 30+ years ago is the level of disposable income people have such that second homes, vacation homes and bigger homes have become way more common.

tmnvix• 4 years ago

I would argue that second homes, vacation homes and bigger homes have become way more common because in the past these things cost money, whereas now they make money (i.e. large capital gains). I think we are possibly entering a phase where a vacation home is again going to be a costly luxury and not an 'investment'.

gfrff• 4 years ago

One of the differences is you c can liver in the investment. This means either not paying rent or collecting rent. The appreciation might be lower than the stock market but dividends are less than rent too.

nxm4• 4 years ago

Easy way to save money when selling a home is to just sell it yourself. Real estate agents are, imho, one of the most useless professions. All you need is a real estate attorney, which you’d need one anyway.

coldcode• 4 years ago

I just sold my house for a ridiculous number. My realtor got 50 people to tour the house in a single weekend, and 5 places offers and I took the one 10% over the asking price. It's not a mansion or anything, and not in some high tech city, but nice area and a bit of land. The 6% commission is not really that much. Just prepping the house took all of my energy; trying to do marketing as well would have been too much.

Like many things you can do everything yourself, or contract to others to do the things you are not good at, or don't have time for. Arguing realtors are useless is like saying accountants are useless, or lawyers are useless. I also did not re-roof my house. But of course you could get terrible accountants, lawyers or roofers, and you could possibly be terrible at stuff yourself. Some people think programmers are useless and some are, but that's not sufficient to try writing it yourself if you aren't one.

jaclaz5• 4 years ago

The 6% commission is not really that much.

Sure, because you (or your agent) managed to sell 10% more than asking price.

Try re-evaluating this 6% if all offers were 85-90% of asking price, and confirm that it is not really that much.

seanalltogether• 4 years ago

To add onto this, many buying realtors will not show a house to their client that is for sale by owner. They know they won't get their cut of the commission so they leave it out of the options. They will only visit if their client specifically finds it and brings it to them.

briandear5• 4 years ago

A good agent gets you more buyers. More buyers mean you can sell for a higher price. And coordinating showings and offers is a lot of work. Agents also expose the house to a wider buyer pool via the MLS. And most standard house deals can use standard contracts, so an attorney isn’t generally necessary. I recommend attorneys for all commercial leases because those are generally complicated. But for buying a simple residential property using standard contracts — pretty routine.

ryanmercer• 4 years ago

We bought our house about 20 months ago, the guy bought it at auction for about 50k and sold it to us for 179k (and now it's worth 230-245k because of the past 2 years) after having flipped the one across the street soooo, I mean...

ashalhashim• 4 years ago

“Between 2006, the peak of the previous housing bubble, and 2019, average home prices have increased just 13%, according to the S&P/Case-Shiller Home Price Index. In that same time period, the S&P 500 rose 125%. In other words, stocks did 10 times better than real estate”

I can’t take an article seriously when it purposefully ignores what’s happened in the last three years because it negates the point it’s trying to make.

foobarian• 4 years ago

Weasel words. Should have said "In other words, stocks did 10 times better than real estate... if you bought and sold at those exact times". It's easy to cherrypick these high and low marks to prove whatever point you need.

jfk13• 4 years ago

The article is dated 2019, so it's not a case of "purposefully ignores what's happened"; the last three years hadn't happened yet!

jacknews2• 4 years ago

The problem with this argument is rent.

If you can buy a house (to live in) without a mortgage, or with a very low rate, you not only reap the capital gain, but save on paying someone else rent.

sys_64738• 4 years ago

Generally a mortgage is finite then you own the asset whereas rent is infinite with no asset afterwards. I don't get the reason others buy or rent but for me it's all about owning my home with mortgage payed off ASAP. The last thing you want going into retirement is paying for a place to live.

briandear5• 4 years ago

You pay the government rent in the form of high property taxes. It’s insane that you can never actually own your house. Taxes should be based on consumption, not income, or simply existing.

jacknews2• 4 years ago

Actually, although it makes complete sense to own land rather than pay rent in perpetuity in our current economic system, it is also totally unjust. The land belongs to all of us, like the air. Allowing individuals to own it, and especially to bequeath it, is the root of many of our problems,

nimbius• 4 years ago

as someone in and around professional tradecraft its always burned my ass to watch a husband wife couple buy a slab on grade clapped out flophouse with structural failure, pump $2200 worth of cheap contractor fixtures bathtub inserts and granite counters into it, and demand triple its price before it falls into the earth and their overleveraged low interest loan blows up an already teeterng market.

findthewords• 4 years ago

Demand-side economics:

Low mortgage rates create a shortage of affordable housing by increasing demand. For example:

-Speculators buying things and selling them for higher price later, that is a rational thing to do.

-Normal folk who simply want a home rarely think long term, 50 years into the future, during which rates may vary and only look at what they can afford to pay monthly, right now.

In a high interest rate, high inflation, high wage growth world houses are a BAD INVESTMENT because of erosion of value by inflation. What happens to bad investments? Their prices collapse, investors seek targets elsewhere. The only people who buy affordable housing in a high inflation environment are people who don't mind the deprecation in value and have a steady income to afford it.

fio_ini• 4 years ago

If you're gonna live somewhere between 2-5 yEars why wouldn't you buy so you can save money and build equity. Even with high interest rate... use this https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...

jmyeet3• 4 years ago

Whoever wrote this doesn't really understand what they're talking about.

Side note: this is written in 2019. Can we update the title?

First, terminology. "Flipping" houses has a completely different meaning. The author mentions buying a house and "flipping" it 5 years later. That's not what flipping is. Flipping is short-term and typically means rehabing a property. Done quickly, you can make a profit on this if you're good and can control your costs and keep to short time frames. People do pay a premium for finished products and/or just don't want to deal with the headaches of massive renovations.

Second, the author makes the same mistake every pro-stocks author makes and completely ignores leverage and borrowing rates. 1-2 years ago you could get a 30 year fixed mortgage as low as 2.5% with an 80-95% LTV. Try getting that on any portfolio. Houses don't have margin calls either.

Third, this was written in 2019. A lot has happened since then. The 2006 to 2022 housing situation is radically different.

Fourth, the national average of house price growth over that period isn't really meaningful. This isn't stock-picking as the author alleges. Just narrow it to greater metro areas with low unemployment, a growing population (even modestly so) and relatively low state public debt (ie not Illinois) and the picture is radically different.

Fifth, real estate tends to be a very good hedge against inflation. We're seeing that now. Inflation has skyrocketed and so has housing in the last year. That's not an accident. There are some systemic problems here but that's a separate topic. As someone who is trying to protect the real value of your assets, you only really care that it is could happen or is happening not necessarily why.

Lastly, property tends to be much better at generating an income than any other asset class. Gross yields of 8-10% aren't that uncommon. Getting a dividend yield like that is going to be much harder and will have much greater capital risk.

metacritic122• 4 years ago

Absolutely agree with your analysis above.

The econ of the article's analysis is rubbish. She compares indexes that exclude dividends, cherry picks time periods, doesn't seem to command basic econ understanding.

There are lots of good reasons to critique house flipping, like she could have: - Given statistics on average returns of house flippers. - Show how naïve investors and flippers get burned. - Even a piece of ancedata about one couple getting burned is at least real news.

But she doesn't do any of that.

fweimer• 4 years ago

Regarding lack of margin calls, is there truly no way for the lender to renegotiate or get out of the contract if the market value of the collateral depreciates too much? And well before the borrower fails to meet interest payments?

jmyeet3• 4 years ago

The first thing to know is that there really is no "lender" in the traditional sense.

The first form of banks we had we had had depositors deposit money for safekeeping. Banks would then lend that money out to earn interest. We then basically decided this was too conservative a strategy so we have fractional reserves, meaning if you have $100,000 in deposits you might be able to lend out $1 million. A lot of Crypto Andys see this as a problem. It's not, particularly because depositor funds are guaranteed by the government (up to a limit) in the US at least.

But in recent decades we say the rise of mortgage-backed securities ("MBS"). Banks will take those mortgages and package them into what are effective bonds and then sell them to the market. This is now completely off the bank's balance sheet so they're not even really the lender anymore. They're basically just the agent who collects the repayments that get packaged up and go to the MBS holder.

Non-payment of a mortgage will give the bank some options depending on your state but there are a lot of varying consumer protections here too (eg non-recourse states mean the bank can typically seize the property being the collateral for the loan or go after you for any outstanding debt but they can't do both).

But if the loan is underwater (meaning the loan value exceeds the asset value) the bank can only really do something if you stop making payments. There is meant to be due diligence here done by the banks to make sure the entire package of property being an MBS isn't underwater. Obviously this failed spectacularly in the subprime era.

But one house being underwater isn't generally a problem.

ip262• 4 years ago

Successful flipping, as I’ve come to understand it, is basically a general contractor plus capital. In other words, it’s a variation on an existing line of work that allows the gc more control & speed, but it’s still a job, and most of the profits are the result of cost efficiency & sweat equity.

metacritic122• 4 years ago

Is CBSNews doing novel research in this article?

It starts with reporting a survey on Americans' beliefs (specifically that they can make money flipping houses). This is fine and normal news.

Then it transitions to novel research where the not-explicitly-questioned ground truth is "no: real estate flipping can't make money". How about cite some economists about bad future returns. Or at least some bank analysts?

Instead, CBSNews's "analysis" that real estate doesn't make money starts with this gem:

"Sadly, real estate is no better an investment today than it was in the previous century—and that's to say, mediocre at best. For people with a bit of money to put away, the stock market will almost always give the best return.

Between 2006, the peak of the previous housing bubble, and 2019, average home prices have increased just 13%, according to the S&P/Case-Shiller Home Price Index. In that same time period, the S&P 500 rose 125%. In other words, stocks did 10 times better than real estate."

The author assumes:

- That returns to housing measured from the past peak is an unbiased estimate of housing returns.

- That returns to stocks measuring up to today (one of the biggest stock bull runs) is an unbiased estimate of stock returns.

- And that past returns from these periods will predict future performance.

- To put the cherry on top, she compares two price indexes, not total return indexes. Dividends (rents) are totally excluded from the series.

None of this is pointed out by the article itself, or even questioned. The most basic first-year-econ-undergrad mistakes are being made here. Which is unsurprising since this analysis seems like a journo LARPing as an economist to finish a writing assignment.

bluedino• 4 years ago

Think? During the last year they were doubling their money around here.

astura2• 4 years ago

This article is extremely confusing. It's comparing stocks, a purely financial instrument, with a personal home that you live in and calling that "flipping houses." It's just all over the place and very surprising it's coming from such a mainstream publication.

People mainly buy the houses they live in in order to have a place to live, full stop. Investment properties are a completely different concept and most Americans aren't involved in real estate investing whereas most Americans are involved in buying personal homes. It also totally makes sense people who are very unfamiliar with financial instruments (like young people) don't have any idea about what sort of return they have. Everyone's familiar with houses though - TFA says 2/3rds of Americans own their house.

Like, duh, you aren't going to make money just buying a house to live in - If I sold my house at a big profit because the housing market overall increased I'd still have to live somewhere so my "profit" would just go into the increased cost of my new house and I'd be out closing fees and agent fees on both ends.

I think a house you buy to live in is a bad investment and I own much more stocks than I have equity in my house. I've put thousands into my house in the last several months especially and it only seems to be getting more and more expensive every year I own it. I'm thinking I might have to reduce my monthly savings for the first time ever.

However, I have to live somewhere and I like the security of owning my house and I like that I can customize it and nobody tells me I can't have cats. I have the money to pay extra for that. It's not an investment though, at least not a financial one.

astura2• 4 years ago

Follow up to my own comment because I'm still baffled by this article that I keep thinking about it.

I guess the article is based on a survey where the question was "For money you wouldn't need for more than 10 years, which ONE of the following do you think would be the best way to invest it?" and the top answer is "real estate."

So yeah, that doesn't AT ALL mean that people who answer "real estate" think that the house that they live in will make them rich. Some might think that, but most people think buying an investment property means that the buyer will buy low and rehab it to flip or rent it to collect income. The entire premise of this article just doesn't make sense.

frankbreetz• 4 years ago

Flipping houses is not that different then building houses. If you buy a house that is not inhabitable make, make it habitable and sell it for a profit, that is value added to the economy and is a good career path.

There are some people that take advantage of uninformed sellers buy a house cheap and put some paint on it and mark it up significantly, but there are bad people in every industry.

This paragraph makes it sound like a hit piece: >>Between 2006, the peak of the previous housing bubble, and 2019, average home prices have increased just 13%, according to the S&P/Case-Shiller Home Price Index. In that same time period, the S&P 500 rose 125%. In other words, stocks did 10 times better than real estate.

-Seletivly picks a period of the biggest housing crash in history and there is still increase.

-that would be the amount it increased with no value add.

-if you buy, hold, and rent you will make significantly more. If you are talking a 13 year period you are probably doing this. You buy with mortgage, have tenants pay mortgage, mortgage gets paid off plus profit. This stat leaves of monthly profit plus the fact you only had to 20% down, so you cash on cash return of just appreciation is closer to 75%. Also about 30% of your mortgage would get paid of if you had a 30 year mortgage, and almost all of a 15 year mortgage.

Real estate can grow with cpi and still be a good investment. You just can't be leech and have to add value to the economy. I.e Let some live there and build improvements. It is more hands on,but definitely better returns then the stock market.

Joel_Mckay• 4 years ago

Las Vegas was built on the irrational ambition of gamblers, and on average every visitor still loses to this day. However, there are some rules about Dirt that have held for a few centuries:

1. “30% rule”: if your principle+interest+tax payments exceed 30% of your income for the duration of the debt, than your family will always remain poor and unlikely understand why

2. “200 month rule”: a holdings true worth is only what can be extracted from renting it for 200 months... the rest is 100% BS...

3. “Check regional population trends age profile”: Most speculative investors understand there is a >17% population decline happening over the next decade, and will focus on urban centers for risk mitigation. In my opinion, inner-city senior care homes are a good investment for the same reason.

4. “Never trust anyone not legally obligated to respect your interests”: Make sure a bonded financial-adviser fiduciary type appropriate to your needs is signed on with your legal representatives. Opinions from Bankers, random investment advisers, and golf buddies can have ulterior motives (toxic assets, TV hyped pump-and-dump scams, and cult stock-swarming scams).

Dirt backed holdings are not what most people assume, and watching the equity get clawed back by banks again never ceases to amaze. The real insult was the 3 million foreclosed American homes still making payments in the last credit-crunch, reacquired with taxpayer bailout money, and then rented back by wall-street funded holding firms to the same families at another address. No one went to jail, nothing changed legally, and like any successful con it will likely happen again soon.

Americans still think they can make money flipping houses

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