Analyst Warns of Artificial Appreciation

Analyst Warns of Artificial Appreciation

09/20/2013 BY: TORY BARRINGER

As home price appreciation continues at accelerated levels, John Burns Real Estate Consulting  is warning clients in certain areas to keep in mind the artificial boosting effect that home “flippers” bring to the market.

“Home price appreciation has been so rampant, particularly in California and Florida, that flippers and get-rich-quick scam artists are flourishing again,” said Chris Cagan, VP at John Burns. “Just as in the mania of 2004-06, flippers make money when the party is raging, but inevitably, someone loses when the party is busted.”

Using anecdotal data for prices paid, repair costs, and selling prices for flipped homes across the nation, Cagan calculated an average net profit of 32 percent, “wildly [surpassing] the reality of the recovering market.”

Part of the growth in flipping activity, he remarked, stems from its growing popularity in the media.

“Flipping has moved beyond a segment of professionals working with undervalued and distressed properties; seminars, tours, and television shows encourage people to invest with flippers or to flip homes themselves. As in the boom of the previous decade, many people see easy money to be made,” he said.

Those perceived gains, however, aren’t realistic in a market in which prices are rising at 10 percent per year. Given the degree to which prices have risen due to house flipping, Cagan says smart investors must recognize the risk in the market.

“Today, the fundamentals for continued price appreciation are very good in the majority of markets,” he said. “However, do not assume that recent successes will continue forever, and be cognizant of the fact that artificial demand—flippers flipping to other flippers is the ultimate artificial demand—can distort your market.”

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