The rising prices in the housing market within the last year (in some cases as high as 10%) are a good sign for the economy, as well as for homeowners and investors hoping to make a profit. Since the bottom fell out of the housing market and decreased home values as much as 30%, home owners, realtors, and investors have been slowly recovering their losses. With these changes, the practice of house flipping is increasing the most it has since the 2003-2006 boom.
However, some experts are urging caution to potential speculators, otherwise known as “house flippers.” They predict that a full recovery of the housing industry is several years away, with the road still bound to be bumpy and unpredictable. The potential for house flippers to make a profit is increasing with the prices of homes, but so is the potential for them to go under. Other factors in the current economy, such as the low supply of new housing and low demand due to the ruined credit of hopeful homeowners, could be creating a “bubble” of false improvement that may burst if just one factor changes.
What is “House Flipping”?
Unless you’re an avid fan of the reality TV show featuring (somewhat) true stories of house flippers, you might not know what this term means. Basically, house flippers are people who buy up cheap real estate, improve its market value, and sell it for a profit. This is a type of speculation — the practice of making a risky but sometimes highly profitable investment.
During times when the economy drives the prices of real estate lower than usual, people who have ready available funds see an opportunity to make a little money, preferably as quickly as possible. This practice, also known as “buy low, sell high,” is familiar to investors and market watchers. House flipping is one of the privileges of a capitalist economy — anyone is free to seize this investment opportunity.
House flipping seems like a pretty straight-forward guarantee of profit, except for one unpredictable variable: interest rates. As the interest rates rise, so do mortgage payments. Potential home buyers might rethink their decision if rates are higher than they can afford. This can leave house flippers stuck with a home they can’t sell and might not be able to afford themselves.
The Federal Reserve, largely responsible for influencing the interest rates on mortgages based on their release of cash flow into the economy, have been operating on a “loose money” policy while the job market is still recovering. But, they haven’t spelled out the exact conditions that will drive them to tighten up funds and consequently drive interest rates higher. The greatest fear of house flippers is the cruel twist of a lucrative investment turning into a personal financial disaster.