After an incredible run on home values in 2021, real estate investors are looking ahead to 2022 to see where the real estate market could be headed. Given that fix-and-flippers, in particular, rely on accurate predictions of future value, knowing where things could be going is a key facet of their business. While no one has a crystal ball, some indicators and data can be used to help us formulate predictions. Consider these four predictions for house flipping in 2022.
Values will rise at a slower pace
Big players, including publicly traded companies like Zillow (Z 1.90%) (ZG 1.84%), have said that they expect increases in home values to cool a bit in 2022. The company's August 2021 to August 2022 forecast, released last month, predicts home prices will grow at a mere 11.7% instead of 19.9% as in the prior 12-months.
The company has doubled down on the theory of slowing real estate values by pulling out of its iBuying business, which was essentially a tech-driven fix-and-flip model. Zillow said that its purchase costs exceed potential sale prices even after repairs and renovations are made to add value.
Fannie Mae's latest housing report predicts home prices will rise closer to 7.4% in 2022.
Realtor.com's September summary found that the pace of price increases fell in both August and September, the first back-to-back monthly decrease in the past year. This indicator shows that home sales could be slowing, which would, ultimately, slow price growth and lead to a rebalance between supply and demand.
Home profit margins will continue to dip
ATTOM Data Solutions, a real estate analytics firm, found that profit margins for fix-and-flippers were at 10-year lows in the second quarter of 2021. Data for the third quarter hasn't been released yet, but given the rising costs and difficulties of getting supplies and materials for renovations, there's a strong chance this trend will hold for the remainder of 2021 and 2022. The report states that compared to the price the investor paid for the property and the price it sold for, home-flipping profit margins, or return on investment (ROI), were down to 33.5%. That is still hefty, but it also doesn't account for typical expenses associated with fix-and-flips, including holding, labor, and repair costs. In reality, profits could be much lower.
Supply and labor shortages will continue to be challenging
It may seem counterintuitive that profit margins are narrowing while home prices still are rallying. However, inflation, increased labor and materials costs, and supply shortages, have prolonged the time it takes to complete a flip while adding significantly to the cost. These conditions probably will continue into 2022, as worldwide supply chain issues persist. So, investors should prepare for more of the same in 2022.
Competition will remain high
Competition is heavy in the real estate investing world. Hot markets, like Naples, Florida; Washington, D.C.; and Kirkland, Washington, a suburb of Seattle -- three of the 10 highest profit-margin markets for fix-and-flip investors, according to ATTOM Data -- are often saturated with fix-and-flip investors. In my personal markets of St. Petersburg and Orlando, Florida, it is extremely challenging to find a worthwhile flip and not be outbid by the competition.
But individual investors aren't only competing with other fix-and-flip investors or everyday homeowners. Now, institutional buyers, including publicly traded real estate investment trusts (REITs), large hedge funds, and real estate investment firms, are flocking to the single-family housing game. These companies have the competitive edge of buying in bulk and access to cheap capital. Investors looking at one-off real estate owned (REO) properties in their local neighborhoods may start to see more homes bought by companies such as Invitation Homes (INVH 1.34%), Blackstone (BX 2.19%), or American Homes 4 Rent (AMH 1.35%), among others, making inventory even harder to come by in 2022.
It's not all bad news
This year was a tough one for fix-and-flip investors, and it appears 2022 will be similar. But that doesn't mean there aren't still investment opportunities. Investors have to be more diligent and creative than ever, finding new ways to source leads in 2022 while accounting for increased costs and labor and supply shortages. But a slowing market could be good news for investors, possibly translating into new opportunities. Time will tell.