There’s a new bill in California called AB 1771 that proposes a 25% tax on the profit of home flippers. This is worth talking about because laws can affect the housing market. This is NOT a political post, but I want to talk about some of the issues involved and offer perspective based on stats and expertise.
News piece with Fox 40: A few days ago, I shared some thoughts with Fox 40. And yes, I referenced mom jeans. New career high? Enjoy below (or here).
Anyway, let’s talk about this bill.
THIS BILL IS ABOUT FRUSTRATION:
1) Frustrated with home prices: People are frustrated with the skyrocketing price of homes and rents, so something needs to be done.
2) Frustrated with investors: There is no mistaking investor activity has been increasing nationally, and people are frustrated about that because they feel investors are squeezing them out of opportunities.
a) John Burns stats: This visual from John Burns Real Estate Consulting shows investors purchased one out of every three homes in the United States in January 2022. This is definitely up from a decade ago, though it’s not clear how much of this represents flippers (not all investors are flippers).
b) Redfin: Stats from Redfin show investors purchased 18.2% of the national market during the third quarter of last year. This is a much lower percentage than John Burns, so we’ll have to figure out which stats should be given more weight. Of course, Redfin’s numbers focus on Q3 of 2021 instead of January 2022.
Local: Redfin states 19.4% of buyers in Sacramento are investors, while John Burns says 26% for the same time period. Keep in mind about 15% of sales in the region are cash, which reminds us investors don’t always use cash. Check out investor activity in cities across the country.
c) Sensational percentages: AB 1771 states there has been 51% growth in investors in Southern California since last year. I’m not sure where this figure is coming from, but the OC Register had a piece from November 2021 where this stat was mentioned. A couple of things. The bill is about flippers, and it’s doubtful 51% represents flippers alone (key point). Secondly, a focus on percentage growth is making this stat sound super sensational. This is a nerdy point, but it makes all the difference. Look at the Redfin graph above. There was a dip in investor activity one year ago, which means when we compare today with then, the growth stat this year sounds insane. Look, I’m not downplaying the trend, but I am saying we have to be careful with percentages (especially if last year was low).
THE PROBLEM WITH THIS BILL:
1) It’s easy to blame flippers: The real estate market has seen dramatic increases in value – especially during the pandemic. This is extremely frustrating to many consumers, but at the same time, flippers aren’t the big driver of price gains. Crazy low mortgage rates and incredibly anemic housing supply are the big culprit. I know it can sound triggering to hear this, but it’s easy to vilify flippers and pin the trend on them while ignoring bigger issues.
2) Flippers are creating housing supply: This bill targets home flippers, who are actually creating inventory for buyers. It’s true that these homes are going to be more expensive after being remodeled, but keep in mind some of these homes would not have been able to obtain traditional financing due to condition. And most of all, buyers are purchasing these homes, which shows the public wants them (huge point). Flipped units come in all sorts of price ranges, and there are many first-time buyers also buying flips.
3) Institutional investors are getting a pass: In the background, Wall Street investment funds are salivating over residential real estate, and the irony is AB 1771 doesn’t target them at all because they’re buying and holding instead of flipping. We’ve seen lots of articles about corporations like Invitation Homes or BlackRock. Sometimes these stories are blown out of proportion, but there’s no mistaking we’re seeing big entities trying to play Monopoly in real life.
4) This bill doesn’t treat the real issue: The real problem is we need more supply and more affordable housing. This bill will create a fund with tax revenue to benefit some, but it doesn’t help homes become more affordable, and it doesn’t lead to producing more inventory for consumers.
Ideas? All that said, I am not a policy maker, but is there a way to incentivize investors selling to owner occupants? What have we seen work in other countries? Can zoning be amended to help create more opportunities for building homes? Is it possible to lower exorbitant permit fees and/or streamline the building process? Moreover, a bill like this sounds like something born in an up market. Would we want this if prices weren’t rising any longer? Lastly, if you penalize home flippers, will this pave the way for more buying and holding, Airbnb rentals, and institutional investor activity?
Anyway, that’s what’s on my mind.
COMMENTS: I’ll only approve comments that add to the conversation. This topic can quickly become a cesspool, but that’s not the vibe here.
MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.
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Questions: What do you think of AB 1771? What did I miss? What are the positives and negatives?
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