Greasing the skids? Putting numbers to the FHA’s “anti-flipping” waiver

February 1, 2011

by Scott Sambucci

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(Note: This article was also published on Seeking Alpha today.  I occasionally post new articles there and/or re-post articles published here.)

The Federal Housing Administration extended the “anti-flipping” rule which restricts re-sale of an REO property within a 90-day period.  As DSNews reported – “The move is intended to help stabilize home values and improve conditions in communities experiencing high foreclosure activity.”  What does that mean for housing prices? Like most things in life, it depends… Sounds good, but is it really putting a dent into the supply problem (both of them, that is…)?

A higher percentage of active listings appear as flips in the non-judicial states (California, Nevada and Arizona); more than 6-7% active listings in these three states. Compare this to three judicial states (Illinois, Florida and New York) where flips comprise only 2-4% of the active inventory. Looser laws loosen up the market more.

Non-Judicial states:

Percentage of Active Listings previously available at a lower price in the last 90-day period: CA, AZ & NV

Judicial states:

Percentage of Active Listings previously available at a lower price in the last 90-day period: CA, AZ & NV

We discussed this a bit back in November looking a few markets and the propensity of active listings to get “flipped” (we statistically define “flips” as “Percent Price Increased” – a measure of the percentage of active listings that have been on the market within a 90-day period at a lower price. It happens to be the same period that has been waived by the FHA.)  Interestingly, the number of flips by market provides some key insight about how the foreclosure process – whether it’s a judicial vs. non-judicial state – affects a market’s ability to heal.  (RealtyTrac has a nice table showing each state and whether foreclosures are sold via trustee, sheriff, or courts.)

A few points doesn’t sound like much, does it? Because it’s not.  While there is a distinction between judicial and non-judicial states, a 2% difference in California isn’t all that much based.  Total active inventory in our California Composite (black line, left axis) is about 125,000 single-family homes.  A 2% differential is about 2500 homes for sale.  Not a very impressive number.  Additionally, housing demand as measured by our Market Action Index™ (any value below 30 is a “buyer’s market”) shows that the market cooled considerably since the expiration of last year’s tax credit.

Altos California State Composite: Active Housing Supply vs. Altos Research Market Action Index for single-family homes (90-day rolling average). This composites consists of 26 MSAs across the State of California.

Presumably, the flipped houses are ready to go; buyers can move right into livable conditions now that the roof is repaired and copper pipes are replaced. That’s good for first-time home-buyers who are using the FHA’s 3.5% down payment option to buy a house. Certainly there are flips that fall outside of the 90-day relist range that is defined here, but even doubling the percentage of flips in these markets shows the relative small number of rehabilitated houses for sale that comprise the open market. As inventory climbs — flipped, distressed, or neither — housing demand simply lacks the gusto to rescue the market over the short run.

All that said, every little bit helps. The sooner we rip the bandage, the better.

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