Home Flippers Are Hurting. Here's Why

What goes up must come down.

Home flippers have hit a rough patch. In an attempt to cool inflation, the Federal Reserve has spent the past 10 months steadily increasing interest rates. The idea is to cool inflation by making it more difficult for people to overpay for housing and consumer goods.

In January 2022, the average interest rate on a 30-year mortgage sat at 3.439%. Today, it's 6.875%. To put that in perspective, that moves the principal and interest payment on a $400,000 loan from $1,783 to $2,628 -- making it tough for some buyers to qualify for a mortgage.

But it's not just everyday households who are feeling the sting. Home flippers have also been hit hard by the market lately. Here's why.

What is home flipping?

"Flipping" is the term used to describe the purchase of a home strictly for resale. An individual or corporation buys a property, makes necessary repairs, adds cosmetic features designed to attract the average home buyer, and sells the home.

While there's plenty of blame to go around, these investors are partly to blame for skyrocketing home prices during the COVID-19 pandemic. They were often able to outbid other buyers by making all-cash offers. They gambled on the fact that housing prices would continue to soar and, if they could flip a property quickly enough, believed they would walk away with a tidy profit.

Getting burned

As the Fed systematically raised the interest rate, potential home buyers slowly dropped out of the market. With fewer buyers, home sellers across the country have been forced to lower their asking prices. By the time kids went back to school last fall, the typical house was sitting on the market for longer, and the average home sold below the asking price.

Suddenly, home flippers who'd banked on the belief that they could scoop up a property, make some changes, and watch home buyers trip over themselves to pay far over the asking price were left out in the cold.

They're not alone

Home-flipping reached record highs in early 2022. According to a Redfin report, investors purchased 18.4% of all properties sold during the fourth quarter of 2021. This number represents the largest share of homes ever purchased by investors.

Whether they were a seasoned investor or an individual who'd watched enough HGTV to believe they could cash in on the trend, rising interest rates and dropping sales have them caught in a vice.

The result

Many of those investors who entered the market hoping to rake in cash must now consider lowering the asking price on their properties. Simply put, slumping demand means they're not likely to get as much as they hoped for the homes they purchased to flip.

It may be time to face the facts. The red-hot demand for houses we experienced during the early stages of the pandemic may never return. If it does, it could be years. The task now is to unload any properties they've invested in, a job that is not likely to be as easy today as it was just last year.

The goal of any home flipper is to find an undervalued property to purchase. Due to the highly competitive market of 2020 through 2022, undervalued properties became unicorns, nearly impossible to find. That means that many flippers also paid more for their investment than they hoped, cutting into potential profits. Now that prices are melting like an ice cream cone on a hot day, they face the chance of losing money.

For flippers who borrowed the money to buy a property, holding onto it until the "right" buyer comes along could be costly. Realistically, their best bet may be to take the best offer available to them.

While home flippers profited by the red-hot housing market, it seems that many are now feeling the pinch of dropping home values.