We frequently get asked the question about where the demand for loans comes from and if there are really enough people flipping homes to keep Indicate Capital & COST Fund’s portfolio lent out. The article published in The Real Deal in early April puts a little more color around the demand that home flippers have created. According to this article, house flips accounted for 10.6% of all home sales in the US in the 4th quarter of 2018. The number of flips have not been this high since before the great recession when they hit 11.3% in 2006.
While the correlation of the high number of current flips
compared to just before the great recession may be unnerving, the median profit
for flips in 2018 is more than twice what it was 12 years ago. This means the market is more stable,
flippers and lenders are not taking as much risk, and there are still many
opportunities to make money on rehabbing a house to add value.
One other thing that was interesting from this article is
that more than 40% of all flippers today are corporate sellers. This tends to mean more flippers have
experience in the market and have the ability to take a loss on one property
while making profits on others. We have
certainly seen this in our portfolio as the majority of our borrowers are doing
more than one flip at a time. And our
biggest borrowers tend to be like traditional home builders, but instead of
having a single subdivision to develop, they are building houses in different
areas at the same time.
We believe that the housing market, especially in
Colorado, is still in good shape for the long run. We know that appreciation in the market is
probably slowing down and we are ready for that. But we also believe that flipping houses is
going to be an important sector within the overall housing market. While there are plenty of houses within the
urban market that are still prime for flips, we also believe we are going to
see more and more flips in the suburbs once the neighborhoods built in the 70’s
and 80’s start to turn over.
As always, we are still very diligent in our underwriting
for each loan we issue and we do not assume the market is going to be this good
forever. We are going to continue to
underwrite each house we lend on in a manner that protects investor principal
and will help the portfolio succeed no matter if the market is good or
bad.
There has been a lot of talk, discussion and speculation on the current status and direction the real estate market is taking right now. We saw things slow down quite a bit during the month of November 2018. In December, things picked up a bit, and during January 2019 we have seen quite a bit of loan opportunities. As Denver’s premier lending company, our team at Indicate Capital works very hard to stay alert and aware of the market. At this point we believe one thing is certain – there is a not a lot of clarity as to how 2019 will look, and, most likely, it will be a flatter year than previous years.
The Denver area has had nearly seven years of very rapid growth and expansion. There are many factors driving the growth Denver has experienced for so long. We have seen a very strong population expansion, which has driven much of the demand for housing. Seven Years ago, on a national level, Denver homes were relatively affordable – and even cheap in some cases. Today, the picture looks much different than it did coming out of the Great Recession. Denver has become a top-tier market, meaning it is attracting jobs, large companies, and therefore more investment from institutions. This has driven the development of new apartments throughout the urban core and much of the housing development in the surrounding area. The main issue facing the Denver metro market is affordability. Wage growth has not kept pace with the cost of housing. All of this coupled with the political landscape both federally and at the state level ranging from the federal government shutdown, the Fed raising interest rates, and other trade issues have all caused for increased uncertainty in the market in general.
We expect to see the Denver real estate market moving towards a more “normalized” market. We do not plan to see the same value appreciation that we have experienced over the last few years. Construction costs continue to be so high that new development projects are very difficult to make “pencil”. This holds true in both the commercial and residential space. Both asset categories have seen a very strong market over the past seven years, and rental rates have grown dramatically across the board. We expect this growth to slow over the next year.
Indicate Capital expects there to be very strong demand for private bridge loans as banks continue to become and more tentative in their lending. Additionally, banks have been primarily lending on real estate during this boom period, and their balance sheets are “full” in that asset category per their regulator guidelines. At Indicate Capital, we also look at alternative uses or sources of cash flow from the investment real estate assets we lend on. This could include different tenant types in the commercial spaces, and rental income on projects intended for resale.
Overall, the market will eventually move into some sort of normalized pace and there may be a bit of a slower sales cycle for the homes and projects Indicate Capital lends on. We do not have a “doomsday” outlook on the Denver real estate market.
