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A House of Cards? Why Flipping Might Be Hazardous to Your Wealth…

Ankit Duggal
2 min read
A House of Cards?  Why Flipping Might Be Hazardous to Your Wealth…

The US housing market rebound is a house of cards ready to topple. Flippers should take the changing environment into account when modeling their next flip investments.

Before all the real estate flippers jump down to the comments and state why I am wrong and how flipping is locally drive, I just want to lay out my reasons for why I think that the housing prices are headed for a second crash speaking at a marco/national level.

Reasons for the House of Cards

I have a couple of statistics that I would like to point out:

New home mortgages are guaranteed by government, and he or she is unlikely to estimate anywhere near 91.6%. And yet that is the actual figure as of the first quarter, based on data from Inside Mortgage Finance.

As FHA and VA are concerned, the down payments required are minuscule by conventional standards, ranging from 0% to 5%. According to a recent FHA report, the average down payment required on it’s insured mortgages in the first quarter has been a little over 4%. The VA’s rather chilling statistical category called No Down Payment indicates that close to 90% of its home loans normally enjoy this status.

Housing has also been “supported by low mortgage rates and improved sentiment on the part of potential buyers,” to quote from the May 22 congressional testimony by Federal Reserve Chairman Ben Bernanke, who has been playing a proactive role in such matters. Through it’s aggressive program of buying new mortgage debt, the Bernanke Fed has been helping to push mortgage interest rates to lows previously unseen for 100 years.

Furthermore, mortgage interest rates are rising. In the week ending June 6, the 30-year fixed rate mortgage clocked 3.91% in its fifth consecutive weekly gain, according to Freddie Mac, after hitting its highest level in a year last week. That’s 18% higher than the 3.31% record low set in November of 2012 and almost 17% higher than the 3.35% rate logged in the beginning of May. The 15-year fixed rate broke above 3% as well, to 3.03%.

How the Market Trends Might Affect the Future Housing Industry

Compared to a month ago, the increase translates roughly into an extra $30 per month for every $100,000 of debt accrued. If rates continue their upward march, mortgages will become more expensive.

Current affordability is almost entirely dependent on low interest rates, and there’s no doubt that rates will begin to rise in the next few years,” asserted Stan Humphries, chief economist of Zillow.  ”This will have an undeniable effect on demand for housing, as home buyers will have to spend more of their incomes to buy a home. Home values will have to either remain stagnant while incomes catch up or, quite possibly, home values will have to fall in some markets. This will especially be the case in some markets that have seen strong home value appreciation.”

The first thing rising rates affect is refinance applications. Refi apps have fallen for the past several weeks, logging a 15% drop (after accounting for Memorial Day) last week from the week before, according to the Mortgage Bankers Association. Mortgage applications have begun to tick down too, falling 11.5% from the week earlier.

Photo: Leléch@n ?

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.