posted on 18 April 2017
-- this post authored by Bin He
In Part I and Part II of this blog series, I presented the share and gross gain of house flipping at the national level and the Core Based Statistical Level (CBSA) level in 2016. Today we show there is a positive correlation between home price growth and the share of flipping activity in 2016 for different market segments: overvalued, normal and undervalued.
A flipped property is defined as a property that is bought and sold within twelve months. In this analysis, we also expand our research to all CBSAs that had at least 50 flipped properties in 2016.
Investors bet on short-term home price appreciation when they buy and sell properties within a short period of time. Therefore, as markets get hot so does flipping activity. This direct correlation between home price appreciation and increased flipping activity is evident based on the share of flipping activity hitting an historical high back in 2005 right before the housing market crash, as shown in Part I of this blog series. CoreLogic Market Condition Indicators segment markets into three categories: overvalued, normal and undervalued, based on whether the home price is high, reasonable or low relative to its fundamental value in a certain market. Needless to say, an overvalued market is a hot market; whether or not its price is sustainable over the long term is another topic. Figure 1 shows the average shares of flipping activity for each of the three market segments. It is not a surprise to see the share of flipped properties is highest in overvalued markets as investors believe that home price will continue to appreciate, at least in the short term.
Figure 2 shows the relationship between home price growth in 2016 and the share of flipping activity in 2016 across about 300 CBSAs that had at least 50 flipped property transactions1. The size of the bubble represents the relative size of the population in a CBSA. As we can see, there is a clear positive linear correlation: the share of flipping increased as home prices appreciated which suggests that investors believe quick profits can be made through short-term buying and selling, and in return, the flipping activity pushed home prices higher. From the weighted trendline2 we can see those metros with home price appreciation that was 6.25 percentage points faster also had, on average, a 1 percentage point higher share of ‘flip’ transactions in the local market.
Figure 3, 4, and 5 look at the dynamics between home price growth and the share of flipping activity in 2016 for each of the market segments: overvalued, normal, and undervalued. From the weighted trendline we can see there is a positive correlation in each of the market segments, but the relationship is a little bit different. The overvalued market registered the highest linear correlation indicating investors’ confidence, or even speculation in some cases, on the housing markets’ continuing growth. The undervalued market registered the 2ndhighest correlation, which might suggest that investors in those markets believed there was plenty of room for price appreciation once they saw the price picking up. In normal markets, the share of flipping activity was not very sensitive to the home price appreciation, which may reflect the investors’ not-so-optimistic view on the price appreciation in those markets.
[1 ] The year-over-year home price growth in 2016 represents the price appreciation from December 2015 to December 2016. The CoreLogic Home Price Index for February 2017 was used to calculate the price appreciation.
 The weight used for the weighted least squares linear regression to derive the trendline is the population in each CBSA.
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