Home flipper optimism continues to rise — for now 

Last autumn's low-inventory environment matched with high borrowing rates wasn't just tough on first-time homebuyers — house flippers also found it more difficult to buy new projects and sell their completed ones. 

Flipper sentiment improved in Q4 last year, largely thanks to the softening of mortgage rates around the holidays, according to a new report from John Burns Research and Consulting and online home marketplace Sundae.

But what about 2024? That's up to the Federal Reserve, researcher Alex Thomas told Real Estate News: "If the Fed comes out of their March meeting and takes a more hawkish stance and says they're not going to cut rates in November, I think we could see some of that optimism reverse."

Softening interest rates boosted sell-side demand

Of the roughly 700 flippers who were surveyed for the study, 34% said sales were good compared to seasonal norms, while 15% said sales were poor. This was a major improvement from a year prior when only 25% of flippers said sales were good and 30% noted that sales were going poorly, Thomas said.

"As of December and January, we got a lot of language coming out of the Fed saying that they expect to cut rates 50 to 75 basis points this year on average. I think we saw a lot of investors in the market get pretty optimistic on that pivot, even if we haven't seen it yet," Thomas said.

The decline in borrowing costs late last year created more demand for flips, Thomas suggested, enabling more first-time and move-up buyers to enter the market.

"Historically, first-time buyers — which are among the most rate-sensitive — are typically between 40-45% of flip homebuyers, so flippers really depend on rates not only on the acquisition side but also on the selling side to make sure that they have enough buyers," Thomas said.

Typical flippers took out loans at an average interest rate of 10% for their projects, Thomas said, and spent $62,000 on renovations in the last quarter of 2023. However, 26% of those surveyed said they only spent between $31,000 and $50,000 on renovations.

Where flippers are still struggling

While sentiment has improved nationally, flippers in Texas and northern California were most likely to report being in a tough sales environment. Only 22% of those in Texas and 20% in northern California said the fourth quarter market was good compared to seasonal norms, while a quarter or more of those surveyed in both states said the market was poor. 

Not only is competition among other investors and regular homebuyers fierce in these states, but flippers are also competing with new home builders who are able to offer buyers attractive incentives like rate buydowns. And with over eight months of new home inventory available — compared to just three for existing homes — buyers have more bargaining power with new home builders. 

"It's hard to compete with builders who can get mortgage rates down to or below 6%," Thomas said. 

Prospects look much better for flippers in historically more affordable markets, the report shows. The majority of those surveyed in the Midwest and Southeast — 55% and 54%, respectively — expect to have strong sales in the next six months. Only 4% of flippers in the Southeast and 7% of those in the Midwest expect a poor market in the coming months. 

Thomas said stronger sentiment in the Midwest and Southeast is due to lower acquisition, labor and renovation costs, and less competition. In the Midwest, particularly, flippers are not as likely to run up against major homebuilders like those in Texas.