Bubbles

Flipping bubbles have historically ended in disaster, such as during the Florida land boom of the 1920s.

In the 2000s (decade), relaxed federal borrowing standards (which included the abilities for a subprime borrower to receive a loan, and for a borrower to purchase a home with little or no money down) may have led directly to a boom in demand for houses, thereby affecting the supply. Since it was easier to borrow, many investors snapped up investment homes without having to put money down. Additionally, since so many investors were purchasing homes, this left even fewer homes available to be purchased by owner-occupants. Since the ones that were placed back on the market by flippers were priced higher than before the flip, buyers again had even less money to put down. This resulted in a continuing circle until finally the bubble burst in 2008 and borrowing standards began returning to normal, leaving the housing market to bottom out before it begins to steadily correct itself. Flipping was so popular in the United States that many DIY television programs like A&E’s Flip This House detailed the process.

The other significant adverse financial aspect of the mentality of flipping is when interest rates increase. The resulting lack of sales, and major price depreciations (often far below) their previous increases, results in a flood of properties on the market at one time, not selling due to lack of buyers, causing a meltdown of a local market and potentially the economy as a whole.

Rejuvenation and gentrification

“Rational” flipping can encourage a rejuvenation and restoration of a previously decrepit neighborhood, but rising property values can also be seen in a negative light, termed gentrification.

Under the broken windows theory, an unkept house/area attracts a criminal element, which drives out those making a responsible living, which allows for more criminal element, and so on in a vicious downward cycle. The restoration creates jobs, particularly in construction, for locals and generates more sales (and sales taxes) to local vendors (initially those involved in selling construction materials). The newly remodelled homes will then attract new populations and businesses to a region, encouraging more economic development, plus the remodelled homes’ higher assessed values brings more property tax revenues to local governments, allowing for more improvements to the area and driving out the criminal element.

As flipping occurs more frequently in a community, the total cost of living there can rise substantially, eventually forcing current residents to relocate, specifically less affluent younger and older people. On a small scale, flippers can cause distress and disturbance to their immediate neighbors by performing lengthy renovations. Flippers commonly have no interest in neighborhood integration, which may cause tensions with long-term residents. During the real estate bubble, flipping and gentrification both have been linked to the mass migration of people to California, where high real estate prices and ample jobs attracted wealth seekers. In response, many native Californians were forced to migrate to the less expensive areas of surrounding states such as Arizona, Nevada, Texas, Oregon and Washington. This migration of Californians caused further gentrification in the areas that they had moved to en masse. Areas such as Phoenix, Arizona and Las Vegas which were once very inexpensive to live in prior to the real estate bubble subsequently became quite expensive, although such prices have dropped significantly since 2006.

Property values

After a renovation, the house itself will be in better condition and last longer, and can be sold at a higher price, thus increasing its property tax assessed value, plus increased sales for goods and services related to property improvement and the related increase in sales taxes. Neighbors can also benefit by having more attractive homes in the neighborhood, thereby increasing the value of their own homes.

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