Southern California's House Flipping Takes A Dip

Southern California isn't exactly flipping over real estate.

The quick-buck, buying-fixing-selling residential real estate bets were a huge part of housing in both the boom and bust periods a decade ago. Today’s market presence of these speedy resales is nowhere near the crazed heights surrounding the bubble and its subsequent bust.

But the current buzz is more sizzle than sales. Flipping became part of pop culture with the help of real estate-themed reality TV shows like “Flip or Flop,” which started in Orange County.

New data from Attom shows flips were on the upswing nationally in 2016 while declining locally.

The region’s four counties – Los Angeles, Orange, Riverside and San Bernardino – had a combined 11,148 flips in 2016, defined by Attom as homes bought and resold within a year by non-related parties. That local flipping pace was down 3 percent from 2015 and off 49 percent in five years.

Those flipping dips run contrary to slight growth nationwide in 2015 – 193,000 flips, up 3 percent in a year – and slower longer-term decline – down 18.5 percent since 2011.

“Many local flippers are being priced out of the Southern California market and are either going further inland or to other states to flip, or not flipping at all,” Attom’s Daren Blomquist says. “One flipper I talked to in Norwalk who has been doing this for 25 years said he has completely stopped buying and even compared the market to what he was seeing in 2008.”

It’s curious that Orange County, home to the popular “Flip or Flop” show, is the region’s least-likely place to flip.

In 2016, 1,588 flips notched only 5 percent of sales. Flipping in O.C. was down 5 percent in a year and off 54 percent in five years.

One good reason for limited flipping was that Orange County was the priciest place to flip in the region. The median purchase price of $465,000 vs. selling at $585,000, translated to $120,000 in typical gross profits before an expense are incurred. Flips were pricy and slow: an average 186 days, or roughly six months, up 10 days in a year – the region’s largest flip-speed slowdown.

Conversely, San Bernardino County had the region’s largest share of flips, with 1,978 quick sales equaling 7.9 percent of last year’s sales.

Why? It’s the region’s cheapest place to flip: Median purchase price was $182,750 vs. selling at $260,000, or a typical $77,250 profit.

San Bernardino flipping was down only 1 percent in a year and off 46 percent in five years. Flips took 181 days (six months) last year, flat vs. 2015 – the only local county not to see its deal speed lengthen.

Los Angeles County had 5,470 flips, deals that made up 7.6 percent of all sales and a pace down 2.3 percent in a year and off 43.5 percent since 2011. Median purchase was $362,121 vs. selling $489,000, or a $126,879 typical profit – highest in the region. Flips took 193 days last year, three more than 2015.

And Riverside County had 2,112 flips, 6.1 percent of sales and down 5 percent in a year and off 58 percent since 2011. Median purchase was $235,000 vs. selling at $310,000, or a profit of $75,000. Flips took 185 days last year, up four days in a year.

But don’t be fooled by some of these slipping trends in local flipping because quick resales are still a noteworthy slice of the Southern California housing market.

Flips were 6.8 percent of 2016 all home sales in the four local counties vs. 5.7 percent nationwide and 6.3 percent statewide.

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FHA to Cut Fees, Lowering Rates For First-Time Home Buyers

The Obama administration cut mortgage-insurance premiums charged under a government program that’s popular with first-time home buyers with little money for a down payment, a move that may ease the burden of rising interest rates.

The annual fees the Federal Housing Administration charges to guarantee mortgages it backs are being cut by a quarter of a percentage point, the Department of Housing and Urban Development said in a statement on Monday. With the reduction, the annual cost for most borrowers will be 0.60 percent of the loan balance.

The change -- which could be reversed after President-elect Donald Trump takes office -- may hurt bond investors, as it speeds up repayment on some securities. Private insurers that compete with the FHA also could suffer. Shares of insurers MGIC Investment Corp., Radian Group Inc. and Essent Group Ltd. fell 2 percent to 3 percent after the announcement.

The reduction, which lowers the cost of a home for those who use the FHA, is charged to mortgage borrowers. HUD on Monday said the fee cut would save new FHA-insured homeowners an average of $500 this year. The cut would take effect on Jan. 27.

The Obama administration’s decision may cause tension with some Republicans who say a fee cut could put taxpayers at risk by reducing the amount of money the agency collects to buffer against mortgage defaults. The FHA is part of HUD, whose secretary sets the fees. The decision will put the spotlight on Ben Carson, nominated as HUD secretary of under Trump. Carson declined to comment on whether he would reverse the decision, according to a spokeswoman.

HUD Secretary Julian Castro said on a call with reporters he had no reason to believe the cut would be altered by the Trump administration. Trump’s transition team received notification of the premium cut shortly before its public announcement, he said.

“It’s time the FHA passed along some modest savings to working families,” Castro said.

Mark Calabria, director of financial regulation studies for the libertarian Cato Institute in Washington, described the cut in an e-mail as a “bad idea, and irresponsible for an administration on its way out the door.”

The FHA doesn’t make mortgages. It sells insurance, paid by borrowers, on loans protecting investors in case of default. The program allows borrowers to get a mortgage with a down payment of as little as 3.5 percent and a credit score of as low as 580, on a scale of 300 to 850. That makes it one of the most forgiving mortgage programs and popular among first-time home buyers.

Some in the real-estate industry have been calling for another fee cut and heralded Monday’s move.

“Dropping mortgage insurance premiums today will mean a whole lot more responsible borrowers are suddenly eligible to purchase a home through FHA,” William Brown, president of the National Association of Realtors, said in a statement.

The FHA last cut premiums two years ago. That cut, which came as rates dropped and lowered the annual fee for most borrowers to 0.85 percent from 1.35 percent, led to a wave of refinances.

The cut announced Monday will likely have less of an impact, in part because mortgage rates have risen sharply since Trump’s election. The effective FHA mortgage rate at the end of last year was about 4.32 percent, according to the Mortgage Bankers Association, compared to 3.71 percent for the week ended November 4.

Some of the cut’s impact could also be washed out if investors in Ginnie Mae-backed mortgage bonds, which include loans insured by the FHA, drive rates up after the cut.

The FHA required a $1.7 billion taxpayer infusion after the financial crisis, and just in 2015 met its statutory minimum capital requirements for the first time since then.

There is precedent for a change in mortgage fees shortly before a change in leadership. In 2013, Edward DeMarco, then acting director of Fannie Mae’s and Freddie Mac’s regulator, announced that he would direct the mortgage-finance companies to increase fees. Incoming director Mel Watt soon after said he would put a stop to the fee changes.

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The Art and Science of 'Right-Pricing' a Home

Of course, every home for sale comes with an asking price.

Where that price came from, how close it is to today’s actual value, and how likely it is a qualified buyer will pay anything close to that is another matter altogether.

Add to that whether the house has had recent, tasteful upgrades, has been staged like a model home, is in a prime location, has a swimming pool or a killer view and you’re into the difficult science of right pricing a home.

Add further into the equation factors some sellers pack into their desired sales price, and the difficult job of right pricing becomes an art more than a science.

Here are a few examples of right pricing challenges.

• Upgraded to sell: So you have a condo in a great location with an attached garage and you’ve kept it in exactly the same condition as you bought it. Now it’s time to move on and get it sold.

Bring in a designer and a good, reasonably priced contactor, and now you’re the bomb. Quartz. Stainless steel. White. Brushed nickel. Add $20,000 to the recent comps and subtract two months from the time to get it sold.

• Lipstick on the pig: When you have a desirable floor plan in a great location, but don’t have recent, fashionable upgrades, you might just want to replace your light fixtures with something more up to date, change out the cabinet pulls to match the fixtures, give it a new coat of neutral paint and you’ve got a fighting chance of getting a great offer.

As long as you price it closer to the recent sales in more original condition and avoid the lure to ask what the fully remodeled flip just sold for, which is the highest price in the history of the neighborhood.

• Flipping for the big bucks: When you pick up an older house with the most amazing lot in the entire neighborhood (end of the cul de sac, at the top of the hill, with a 180-degree view), you have a unique opportunity to push your asking price even higher.

Say it’s a 1972 home in original condition. Rather than go to market for slightly less than similar recent sales, use your previous flipping expertise. That means flawless design touches, adding a few windows, removing a few walls and hiring a staging company with the best sense of style and emotional appeal.

Do that, and you might get multiple offers and end up selling it for the highest price in the history of the neighborhood.

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Post-Election Rate Spike Will Reverse Course

Rest easy. No need to awfulize. Enjoy your Sunday morning hot cup of joe. The Trump win caught markets off-guard. This created a post-election spike in mortgage rates which are going to simmer right back down in the near term.

At press time Wednesday evening, compared to November 8th, lenders raised their conforming 30-year fixed rates between 0.375 percent and 0.5 percent.

What gives?

“Uncertainty is a piece of it,” said Lynn Fisher, vice president of research and economics at the Mortgage Bankers Association “Tax reform or investment in infrastructure stimulates the economy and helps push up prices, (causing) inflation to pick-up.”

Consumer mortgage rates and fees are derived from mortgage backed securities, which in hand closely mimic the 10-year Treasury rate. For the sake of perspective, the 10-year Treasury topped out on Nov. 15 at 2.23 percent, almost exactly where the 10-year was Nov. 18, 2015, when the rate was 2.27 percent.

The low point on the 10-year in 2016 was July 6 at 1.38 percent. That was less than two weeks after the United Kingdom unexpectedly voted to leave the European Union. When conventional expectations don’t come to pass, mortgage markets have spasms one way or the other and then tend to settle back to where they were.

Fisher said that total residential mortgage funding volume in 2015 was about $1.7 trillion. The MBA projects that 2016 will land at $1.9 trillion. It expects $1.6 trillion in 2017, with purchases climbing 11 percent and refinances falling off.

There is “nothing obvious to keep rates rapidly increasing,” she added.

The silver lining for home sellers is that interest rate events tend to get procrastinating buyers off the fence.

“There is a concentration of buyers that are ready to look because all of the talk that rates are going to go up,” said Candice Blair, broker of Niguel Point Properties.

Comparing a loan amount of $417,000 on a 30-year fixed rate at 3.25 percent of a few weeks ago to today’s rate of 3.75 percent, the mortgage payment increase is $116, or a principal and interest payment of $1,931. Yes, a big jump indeed.

If the Federal Reserve raises rates in December, adjustable rate mortgages will go up a tad.

I’m doubling down. My tea leaves and my crystal ball both show mortgage rates settling back down, at least between now and right after President-elect Trump’s Jan. 20 inauguration. If it were me, I’d float the rate and not lock in until you are cleared to close.

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Californians Fleeing State's High Cost of Housing

California’s warm weather, sunny beaches and world-class schools have lured people to the Golden State for decades, but rising home prices are turning that equation around.

Data analysis firm CoreLogic says that for every two homebuyers who moved to California from 2000 through 2015, five others sold their homes, packed up and moved out.

Arizona and Texas were the top destinations for people moving out of California, CoreLogic reported. Only New Jersey had a higher ratio of fleeing homeowners during that period.

“California had the largest number of out-migrants in 2015,” CoreLogic Senior Economist Kristine Yao said in a blog post published Thursday.

The trend of out-migration was also noted in a separate trio of reports released earlier this year by Beacon Economics. Beacon noted that 625,000 more U.S. residents left California between 2007 and 2014 than moved into the state. The vast majority ended up in Texas, Oregon, Nevada, Arizona and Washington.

The search for more affordable housing is sending low- and middle-income workers out of the state, while higher-wage workers continue to move in, which argues against the theory that high taxes are driving people away.

“California has an employment boom with a housing problem,” said Beacon founding partner Christopher Thornberg. “The state continues to offer great employment opportunities for all kinds of workers, but housing affordability and supply represent a significant problem.”

Home prices and rents have been rising steadily for more than four years.

CoreLogic figures show Orange County’s median home price was up 42 percent in the four years ending in September. Prices were up 55 percent in Los Angeles County, 57 percent in Riverside County and 75 percent in San Bernardino County.

Although home sellers leaving California last year paid, on average, 36 percent less for their new homes out of state, they tended to end up in better neighborhoods, CoreLogic reported. Their purchase prices ranked in the 77th percentile for their new metro areas, while their sale prices ranked in the 62 percentile back home.

“Of the homeowners moving out of state, more of them sold in high appreciation, high cost areas and bought in lower appreciation, more affordable areas,” Yao wrote.

California home prices have risen in part because of a lack of inventory.

From 2005 to 2015, permits were filed for only 21.5 housing units per every 100 new residents in the state. That put the Golden State second to last behind Alaska, where only 16.2 housing permits were filed for every 100 new residents.

On the flip side, Michigan saw 166 permits filed for every 100 new residents.

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