©Reuters. HGTV’s Flipping 101 host Tarek El Moussa walks through a house, nearly razed as it neared completion, with new investors, in Los Angeles, California, U.S., January 9, 2020. HGTV/Handout via REUTERS
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By Amina Niasse
NEW YORK (Reuters) – While the Federal Reserve’s interest rate hikes over the past two years have put a damper on the U.S. housing market as a whole, it has taken a sledgehammer to hit homeowners, from small contractors to reality star.
Just ask Tarek El Moussa, star of HGTV’s “The Flipping El Moussas” and former co-host of the channel’s real estate and renovation-focused mainstay, “Flip or Flop.”
“How do I account for it [interest rates]? I got my ass kicked last year. I lost a lot of money. And that’s just the reality of the business,” El Moussa said.
Indeed, home flipping – the investment in, and often renovation of, a single-family home with the intent of selling it for a profit – has declined from levels seen during the COVID-19 pandemic. According to real estate data provider ATTOM Data Solutions, the number of Americans acting as investors in the real estate market decreased by 38.85% between 2021 and the fourth quarter of 2023. In the fourth quarter of 2023, the share of homes purchased by investors fell 11% year over year, according to a report from a real estate and mortgage company Redfin (NASDAQ:) said.
Nonetheless, real estate investors spent $32.3 billion on U.S. homes in 2023, up from $33.6 billion the previous year, and flippers purchased the lowest-priced 26% of homes during the fourth quarter of 2023, Redfin said.
FRENETIC MARKET
HGTV’s El Moussa purchased 91 homes in 2021, earning him an average monthly mortgage of $600,000. Then mortgage rates rose, home sales in Southern California plummeted, and he found himself with inventory he couldn’t unload.
Home flipping works best in a frenetic “buyer’s market,” with prices rising amid an increase in transactions, said Chen Zhao, senior economist at Redfin. After the Fed began raising rates in March 2022 to reduce inflation, buyers and sellers resisted, creating a gridlock in the housing market.
Rates eventually hit a two-decade high near 8% in October, and the resulting market presented investors with the same problem that homebuyers face: limited inventory and tepid demand.
Rates have eased slightly: Freddie Mac said Thursday that the average 30-year fixed-rate mortgage is 6.87%. However, the current scenario represents a striking departure from the start of the pandemic, when mortgage rates below 4% and increased demand could promise juicy profits.
LOWER MARGINS, WORK PROBLEMS
For Elisa Covington, an investor based in the San Francisco Bay Area, the return on investment in 2021 often hovered between 60% and 70%, occasionally reaching 100%.
“In 2021 and early 2022, my projects achieved much higher returns,” Covington said. “But this year the profit margin for most of my projects has been in line with my expectations” of 30% to 40%.
The lack of demand from homebuyers would make it easier for investors to find single-family homes, but the reduction in inventory has more than offset this, impacting acquisition trends.
Julio Martinez, co-owner and broker of JATS Properties in Los Angeles, said “2023 has been a little weird.” Last year he only acquired six homes and that was also due to the fact that many of the properties were in foreclosure. If it weren’t for that, “we probably would have only done one or two.”
Some construction companies say the cooling of real estate investment has reduced new business activity. Ghulam Mustafa, owner of New York-based Sahara Builders, said the decline in his company’s total renovation projects after the pandemic caused a 40% drop in profits from 2021 through the end of 2023.
Last year “was much slower than the pandemic,” Mustafa said.
For contractors who don’t build new homes, the steady supply of projects without gut renovations is being replaced by smaller-priced renovation projects for existing homeowners, RedFin’s Zhao said.
For real estate developers, meanwhile, lower profits have reduced the labor they can hire for renovations, which can slow sales.
Martinez of JATS Properties had to let go of a full-time handyman, he said. In addition to property flipping, his family-run business operates as a real estate broker and administrator, so the loss of manpower has meant less focus on house flipping projects.
“We had to slow down [workers] on our projects and loan them to our customers,” Martinez said. “We typically give top priority because they are our employees. But when we don’t have the funds to cover our projects, we have them work in our clients’ homes. It’s taking the burden of those employees’ expenses off our shoulders.”
STARS WHITENING
In a context of slow turnover, pinball machines are diversifying their activities.
Martinez, who saw transaction volume in 2023 halve compared to 2021, has begun making property-backed loans to would-be investors. And El Moussa, who needed to prepare for losses he knew were coming from unsold flipper projects, turned to buying wholesale home purchase deals and selling them to investors, deals that typically reap smaller margins but are less risky than traditional flipping.
“To prepare for the losses that were to come, I stopped buying houses to sell and focused only on wholesaling,” he said.
The story has also changed for the reality TV house pinball landscape.
HGTV’s ad revenue fell from a four-year high of $42.7 million in 2021 to $32.6 million in 2023, according to data from iSpot.TV, a TV ad measurement company, though it continues to hold a dominant share in its market segment.
Shows like The El Moussas have increasingly incorporated discussions about tariffs, slow turnover and price acceleration in Southern California to keep viewers engaged, said Loren Ruch, HGTV’s head of domestic content. The show’s development focus turned to self-contained secondary homes, such as a guest house, and multigenerational living.
“People may not be spending huge amounts of money on design or renovation projects, so we’re also looking at a variety of shows with more affordable price points that are perhaps based on not doing as much demolition, but really focusing on the space.” and setup,” Ruch said.