After an incredible run on home values in 2021, real estate investors are looking ahead to 2022 to see where the real estate market could be headed. Given that fix-and-flippers, in particular, rely on accurate predictions for future value and supply and demand, knowing where things could be going is a key facet of their business. While no one has a crystal ball, some indicators and data can be used to help us formulate predictions, including these four predictions for house flipping in 2022.
Values will grow at a slower pace
Big players, including publicly traded companies like Zillow (Z 0.23%) (ZG 0.18%), have indicated that they believe home values will "cool" a bit in 2022. In September, the company shared its August 2021 to August 2022 forecast, which predicts home prices will grow at a mere 11.7% instead of 19.9%.
The company then doubled down on the theory of slowing real estate values by entirely pulling out of its iBuying business, which is essentially a tech-driven fix-and-flip model. Zillow stated its current purchase prices exceed what it believes will be potential sale value even after repairs and renovations are made to add value.
Fannie Mae's latest housing report predicts home prices will rise closer to 7.4% in 2022.
Realtor.com's latest September summary for home sales found that August and September of 2021 were the first negative percent changes in home sales year over year in the past year. This indicator shows that home sales could be slowing, which would, ultimately, make home-price growth slow down and supply rebalance to meet demand.
Image source: Getty Images.
Home profit margins will continue to dip
ATTOM Data Solutions, which tracks home-flipping profit margins, found that profit margins for fix-and-flippers were at 10-year lows in the second quarter of 2021. Data for Q3 hasn't been released yet, but given the highly competitive and still-supply-strained market, there's a strong chance this trend will be sustained for the remainder of 2021 and 2022. The report states that compared to the price the investor paid for the property and the price it sold for, home-flipping profit margins, or return on investment (ROI), were down to 33.5%. That is still a hefty profit margin, but it doesn't account for typical costs associated with fix-and-flips, including holding, labor, and repair costs. In reality, profits could be far less.
Supply and labor shortages will continue to be challenging
It may seem counterintuitive that profit margins are thinning while home prices are rallying. However, inflation, increased labor, and material costs, as well as product and labor shortages, have elongated the time it takes to complete a flip for some while, adding significantly to the cost. This labor-strapped, supply-shortened market will likely continue into 2022, as supply chain issues continue to be ongoing problems globally. So, investors should prepare for more of the same in 2022.
Competition will remain high
Competition is heavy in the real estate investing world. Hot markets, like Naples, Florida; Washington, D.C.; and Kirkland, Washington, a suburb of Seattle -- three of the 10 highest profit-margin markets for fix-and-flip investors, according to ATTOM Data -- are often faced with saturated markets for fix-and-flip investors due to increased demand and opportunity. In my personal markets of St. Petersburg and Orlando, Florida, it is extremely challenging to find a worthwhile flip and not be outbid by the competition.
But investors aren't only competing with other fix-and-flip investors or everyday homeowners. Now, institutional buyers, including publicly traded real estate investment trusts (REITs), large hedge funds, and real estate investment firms, are flocking to the single-family housing game. And these companies have the flexibility and competitive edge of buying in bulk. Investors looking at one-off real estate owned (REO) properties in their local neighborhoods may start to see those homes being owned more and more by companies like Invitation Homes (INVH -1.27%), Blackstone (BX -5.24%), or American Homes 4 Rent (AMH -2.46%), among others, making inventory harder to come by in 2022.
It's not all bad news
2021 was a tough market for fix-and-flip investors, and it appears 2022 will be another tight market to operate in. But that doesn't mean there aren't still investment opportunities. Investors have to be more diligent and creative than ever, finding new ways to source leads in 2022 while accounting for increased costs and labor and supply shortages as they analyze these opportunities. A slowing market could be good news for investors, possibly translating to new opportunities. But only time will tell.
