Is There Still Profit to Be Made From Buying Fixer-Upper Homes?

June Fletcher on the direction of the housing market and how declining house sales and prices may affect investors who purchase and rehab homes in need of repair.
By: June Fletcher: The Wall Street Journal Online
Question: Why is it that your articles act like the end of the housing market is near? It may shake out all or most of the noncontractor "flippers," but so what? The price of houses is irrationally elevated, but there are still a lot of homes that will be moved by the honest "fixer-upper" people, and we will still make money. I have been doing this for a long time, in good times and bad, and a decent home at a decent price will always sell.

- Phillip Wills, Albany, N.Y.

Phillip: I chose your question because it embodies so many of the contradictory thoughts and feelings expressed by people involved in the real-estate industry these days. On the one hand, you seem to doubt articles that assert that the housing boom is waning; on the other, you imply that it will end soon after all. (Or else how will all those noncontractor flippers be shaken out?)

I understand: No one who makes a living in real estate really wants to see the end of this immensely profitable boom. For that matter, neither do most homeowners, who have been treating their homes like ATM machines and relying on price boosts to fund everything from retirement to vacations in Aruba.

But please don't shoot the messenger. My job is to report facts and expert opinions, even if the news is unwelcome. And every forecast I've heard from economists and other experts has projected a cooling of the U.S. housing market this year (though how quickly and by how much remain matters of debate), fueled by such factors as rising interest rates and lack of affordability.

Even real-estate trade associations are predicting the boom's demise. For instance, the National Association of Realtors projects overall median existing-home prices in the U.S. to rise 5.8% in 2006 (less than half of 2005's levels), while existing-home sales are expected to fall 5.7%, to 6.67 million, from last year's record levels. The National Association of Home Builders says new single-family-home sales are likely to fall off last year's record levels, too, declining 9% to 1.18 million, and total housing starts to fall 7.8%, to 1.9 million.

Across the country, real-estate agents tell me, the number of days houses sit on the market is creeping up, and inventory levels are on the rise. Both are early warning signs that prices are poised to fall. And according to the latest statistics from Foreclosure.com, which offers a database of U.S. foreclosure, preforeclosure, government-owned, and bankruptcy properties available to private individuals and tracks the number of these properties,new foreclosures were up 9% in February over the year before. If this trend holds, the company says, new foreclosures will reach higher levels this year than they have in previous years, especially in places like California and Nevada, where speculators are currently pulling out of overheated markets.

It will take some time - perhaps a few months - for homeowners to come to grips with the fact that their vinyl-clad nest eggs aren't expanding anymore, or, in some overheated markets, may even be shrinking. But once they do, they'll be more likely to guard them, and less likely to tap into them for everyday expenses. According to Freddie Mac, the nation's second-biggest buyer of mortgages, the amount of cash home buyers took out of their homes, which reached an estimated $243 billion last year, will fall by more than half in 2006, to about $117 billion.

So where does a declining market leave rehabbers like you? Perhaps a bit worse off when it comes to finding buyers, since folks who already own properties are more likely to stay put when home-price growth stalls and mortgage interest rates rise. But you'll probably find it easier to find bargain properties to fix up, since people tend to let maintenance and repairs slide when they feel less wealthy - plus there will be more foreclosures to choose from.

I don't doubt you at all when you say that a decent house at a decent price will always sell. The problem, of course, is how to know what that price is when your market is in transition. Your success in good markets and bad teaches us a valuable lesson in how to weather the changes ahead: Do your homework, and don't get greedy.

- June Fletcher is a staff reporter at The Wall Street Journal and the author of "House Poor" (Harper Collins, 2005). Her "House Talk" column appears most Fridays on RealEstateJournal.com. Email your questions about the residential real-estate market. Please include your name, city and state. If you don't want your name used in our column, please indicate that. Due to volume of mail received, we regret that we cannot answer every question.

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