Negative effects of real estate flipping
Many experts blame the US real estate bubble in 2004 and 2005 on investor speculation and "irrational" flipping. Very low interest rates were a root cause, but speculation and flipping compounded the bubble. Although the practice of flipping existed long before the real estate bubble, it became more rampant and widespread in those years. Flipping was so popular nationally that some DIY television programs detailed the process. Flipping trends have historically ended in disaster, such as during the Florida Real Estate Crash of the 1920s. In 2006 we see, reported by USNEWS on Wed June 14 2006, that the "Housing bubble correction could be severe."
Flipping can play a role in the gentrification of older communities. As flipping occurs more and more in a community, the total cost of living there can rise substantially, essentially forcing the local people, specifically the younger generations, to relocate. During the real estate bubble, flipping and gentrification both have been linked to the mass migration of Californians to the (once much) less expensive areas of the 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, AZ and Las Vegas, NV which were once very inexpensive to live in prior to the real estate bubble are now quite expensive. The chain reaction continued (continues?), as the gentrified people of these cities had to find somewhere cheaper to live to maintain their standard of living, where they undoubtedly caused gentrification of their own.
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.
Positive effects of real estate flipping
Although most arguments surrounding flipping tend to be negative, it is also possible to identify some benefits from the practice as well.
For example, "rational" flipping can encourage a rejuvenation and restoration of a previously decrepit neighborhood. (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.
Even on a single home basis, flipping can have positive impacts (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).
- Crashes: The Florida Real Estate Craze
- Source: usnews.com, Wed June 14 2006