Is new construction is a good bet for real estate investors in 2020?

Is new construction a good bet for real estate investors in 2020?

If you are like many real estate investors, you are trying to decide where you should put your money in 2020. I don’t have a crystal ball to answer that question, but I did some research to see what the data and experts are saying.

What the recently released housing data and expert predictions tell us

Since we are at the beginning of a new year, there is plenty of data being released and predictions being made. I reviewed what I think are the more relevant stats, trends, and predictions to see if they point to a particular investment strategy for 2020.

New Home Construction Trends

  • December housing starts data seems to suggest a rosy picture for new home construction. Privately owned housing starts in December were at a seasonally adjusted annual rate of 1,608,000. This is nearly 17% above the revised November estimate of 1,375,000 and is 40% above the December 2018 rate of 1,142,000. Single‐family housing starts in December were at a rate of 1,055,000; this is 11% above the revised November figure of 949,000.[1]
  • According to the National Association of Realtors, single-family housing starts will likely total 1 million in 2020, the highest since 2007.[2]
  • Fannie Mae’s Economic and Strategic Research Group predicts growth in single-family housing starts will accelerate to 10% during 2020 and top 1 million new homes in 2021. This is a significant jump over 2019’s increase of just 1%. [3]
  • New home sales are expected to increase by 11% in 2020 to 750,000.[4]

So, do these stats mean new construction is the place for real estate investors to be in 2020? I explore this question further by looking at what the data tells us about the fix and flip market. Although that market has been on fire in recent years, there is evidence it is starting to face some headwinds.

Fix and Flip Trends

  • Return on investment (ROI) on fix and flips is down and near a seven-year low, according to ATTOM Data Solutions.[5] The typical gross flipping profit of homes flipped during the third quarter was $64,900. This sounds like a nice profit on the surface, but the trend is what is concerning. The $64,900 translates into a 40.6% ROI. This is down from a 41.1% gross flipping ROI in the second quarter of 2019 and down from an average profit of 43.5% in the third quarter of 2018.
  • Likely as a result of declining profits, ATTOM Data Solutions also reported a drop in fix and flip volume in the third quarter. They report 56,566 single-family homes and condos were flipped in the third quarter of 2019. This is a 12.9% decline from the previous quarter and down 6.8% from a year ago.[6]
  • Factors impacting fix and flip ROI include high home prices, a low supply of homes for sale, and the rising cost of renovation materials.[7]

One result of the declining profit on fix and flip is a shift to long-term rentals. Maksim Stavinsky, co-founder and COO of Roc Capital, noted that borrowers’ declining profits on flips are leading to much greater interest in renting out renovated properties instead of flipping them.[8]

Conclusion

The bright outlook for new construction combined with the declining returns on fix and flips suggests new construction is a good place for real estate investors to be, or at least worth serious consideration, in 2020. Demand for new homes is high, especially at the lower end—interest rates are expected to stay low and lenders are ready to help.

If you need funding for a new construction project or investment, check out our homebuilder loan program. If you are ready to build, we are ready to lend. Our home builder loans include private money loans to build model homes, speculative homes, and pre-sold homes.

[1] U.S. Census Bureau and U.S. Department of Housing and Urban Development, New Residential Construction, January 17, 2020.

[2] https://www.housingwire.com/articles/builders-are-coming-to-the-housing-markets-rescue/

[3] https://www.cnbc.com/2019/12/18/fannie-mae-boosts-2020-housing-forecast-significantly.html

[4] https://www.nar.realtor/sites/default/files/documents/2019-Annual-Residential-Lawrence-Yun-11-08-2019.pdf

[5] https://www.attomdata.com/news/market-trends/flipping/attom-data-solutions-q3-2019-u-s-home-flipping-report/

[6] https://www.attomdata.com/news/market-trends/flipping/attom-data-solutions-q3-2019-u-s-home-flipping-report/

[7] https://www.cnbc.com/2019/09/19/home-flippers-see-lowest-returns-in-8-years-as-costs-rise.html

[8] https://www.attomdata.com/news/market-trends/flipping/attom-data-solutions-q3-2019-u-s-home-flipping-report/