How Flippers Can Benefit From Seasonality
Robert K. Jafek is Principal at Boomerang Capital Partners, successfully financing and developing real estate since 2006.
It is well known that the residential real estate market is highly seasonal, with activity and prices following the heat: It warms up in the spring and gets hot in the summer before cooling off in the fall and going into near hibernation in the coldest part of the year. As the National Association of Realtors puts it, “every year, transactions and prices tend to be above-trend in the summer while activity typically slows down in the winter.” The seasonality effect has been consistent across time and regions. This predictable pattern leads to a profitable timing opportunity for short-term investors such as fix-and-flippers.
Buy When It’s Cold
Obviously, it’s best to buy homes when the competition and prices are lowest. According to realtor.com, the best week of the year in 2019 to purchase a home after considering all factors was the week of September 22, “during which shoppers [found] less competition, more price reductions and more inventory to choose from.” This point in the year aligns with back-to-school time, when families tend to pause their home search activity and competition eases.
Additional price decreases may become available just before year end, with purchases at this time of year offering discounts, and volumes falling off significantly in January, while not offering similar discounts.
Sell When It’s Hot
According to one analysis, the busiest days to move have recently been June 1 and May 31. With the increased demand during the late spring and early summer, prices tend to creep a little higher, and homes tend to spend fewer days on the market.
The Profitable Opportunity Uniquely Available To Fix-And-Flippers
Given the lack of noneconomic pressures such as getting settled for school, a rehabber can choose when to buy and when to sell, with the goal of having a project completed and ready to sell six months after purchase. The six-month window that yields the greatest gains is buying in the fall and selling in the spring. This school effect can be significant and is probably driven mostly by a lack of sellers.
My analysis of FHFA data considering all years from 1991 until the present and comparing six-month gains reveals that the largest gains came from purchases in September, which are 13% better than the worst month (February). Considering only the years since 2011 until the present and comparing six-month gains, the largest gains came from purchases in October, which are 19% better than the worst month (January).
But This Time Is Different — Or Is It?
Transactions depend on both buyers and sellers showing up, although sometimes in different quantities and with different motivations, leading to some of these seasonal patterns and anomalies. The Covid-19 crisis has created significant uncertainty in all real estate prices, and the effect in home prices has been to shift demand from spring into summer.
The pandemic has also created new buyers, and put sellers on hold such that after a brief pause, prices have returned to their steady upward march. Buyers seem to be motivated to get into their own spaces, adding to the secular trends such as the millennials entering prime homebuying years. Sellers, on the other hand, continue to hold back. Listings are at significantly lower levels than prior to the pandemic, and with current homeowners enjoying significant equity, there is little external pressure to sell.
While local conditions continue to dominate, the seasonality effect seems unimpacted by the unexpectedly moderate changes in the market for single-family residential homes, with buying in the fall to have a home ready for sale in the spring or summer a plan likely to yield profits.
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