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Raising a Red Flag for U.S. Real Estate

"Lending to house flippers hits a 13-year high"

by Bob Stokes
Updated: October 24, 2019

Back in 2005, the word "flip" had entered the lexicon of the real estate world in a prominent way.

Our July 2005 Elliott Wave Financial Forecast saw it as a big red flag:

There's no mistaking it now: Extreme psychology has taken up residence in real estate. The public demand for periodically illiquid pieces of property is an eerie facsimile of the zany excitement for stocks in 2000. It now includes a TV show, Property Ladder, in which subjects buy houses and resell them for a quick profit; and an online trading service, Condoflip.com, where "flippers, brokers and developers come together" to trade as yet unbuilt condominiums.

Well, this game of musical chairs suddenly stopped about a year later as U.S. home prices topped and went into a tailspin for the next five to six years.

Yes, the housing market has since recoverd, but many people lost big before the recovery could benefit them.

Evidently, this lesson from the past has not been heeded by some investors.

In other words, flipping has made a big return.

In April of this year, Corelogic's website had this headline:

Home Flipping Near Cycle Highs, But Flippers Increasingly Adding Value

And, here's a Corelogic chart from that time:

FlippingRates

As you can see, the flipping rate has increased steadily during the past eight years.

The rebound has been so strong that in the first quarter of 2018, the percentage of all home sales that were flips rose to 11.1%, slightly higher than the prior record high of 11% in the first quarters of 2005 and 2006.

More recently, a Sept. 27 CNBC headline says:

Lending to house flippers hits a 13-year high as prices and competition heat up

Some would say, so what -- maybe it's just a sign of a healthy market segment. Maybe so.

However, financial history shows a correlation between real estate values and stock market prices. And when you look at the recent records in the house-flipping segment combined with the fact that the stock market is also near record highs -- after a decade-long bull market, the longest in history -- it may give you pause.

A little over a decade ago, real estate peaked months before stocks. How will it play out this time?

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