House-Flipping Is Back in Style, But Will it Cause Another Recession?

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The art of house-flipping is on the rise again. After a lull during the long economic recession, more real estate investors are again purchasing homes at below-market value, fixing them up, and then reselling them at a profit, often all within the span of a few months.

The house-flipping trend saw its heyday during the housing boom leading up to 2008, when the mortgage bubble burst and lenders subsequently became much more wary of the high-risk loans often used to finance such purchases.

According to a recent report from the Wall Street Journal, however, house-flipping is back in full force. The number of flips in the first three quarters of 2016 reached levels not seen since 2007, and the total sales volume for flipped loans is expected to reach $48 billion this year.

“The floodgates have opened,” said Eduardo Axtle, a 35-year-old house-flipper in Oakland, California, who has taken out some 50 home loans in the past five years.

Unlike conventional 30-year mortgages for owner-occupied homes, which come with an average 4% interest rate and a maximum 25% down payment, short-term flipped loans typically require as much as a 65% down payment with an interest rate between 7% to 12%. Though the sector is small, big-name banks such Goldman Sachs, Wells Fargo, and J.P. Morgan Chase have all reportedly begun extending more credit lines to companies that specializing in house-flip lending.

Some house-flippers have turned what began as a hobby into a full-time career. In fact, the recession may have helped revive the business itself. With 327,069 home repossessions in 2014, under-market value houses have been more abundant in recent years. And as consumers begin to feel more confident about their financial futures, more young people are willing and able to start purchasing homes — in particular, starter homes that have already been fixed up. Nearly half of all home buyers (49%), for example, are willing to pay more for an ensuite master bathroom.

The flipping trend might well be a sign of a robust housing market, but at the same time, others worry that it might engender the same bubble that burst so suddenly in 2008 and caused the Great Recession in the first place. Reality television shows such as HGTV’s Flip or Flop and real estate investing “boot camp” classes may encourage people to take out high-risk loans that they are not prepared to pay back. The rapid lending and buying sprees may also cause a glut of floating debt and inflated speculation on the market.

“Anybody and everybody is getting into the business of house-flipping,” said house-flipper and real estate agent George Geronsin, who recently sold off all of his fixer-upper properties. “That’s when you know it’s the end of the rope.”

With the scars of the recession still fresh, however, lenders and borrowers alike insist that they’ve learned their lessons.

“Actually, I think the financing now is a little bit tougher and a little bit more stringent then it was 10 years ago,” said Realtor and house-flipper Nathaley Burnett of Bellingham, Washington. “Anybody could get a loan 10 years ago. If you were breathing you could get a loan which, you know, help caused the recession.”

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