Could HGTV Unwittingly Cause a New Housing Crisis?
I love HGTV as much as the next home enthusiast, but it’s no secret that many of their shows take some liberties with reality. Like a plywood set design, the dramatic choices and plot twists are often just flimsy, fictional facades thrown together to make the shows more entertaining.
In 2012, a publicist for HGTV basically admitted to Entertainment Weekly that they engineer the process as needed for television: “To maximize production time, we seek out families who are pretty far along in the process. Often everything moves much more quickly than we can anticipate, so we go back and revisit some of the homes that the family has already seen and we capture their authentic reactions.”
But who cares, really? It’s just fun to look at houses and go along for the ride, I think. (And, of course, to howl at other couples about their choices: “Really? You’re picking the second one? What is WRONG with you people?!”)
The occasional artifice of House Hunters is a more or less an innocent fib. The most dangerous lie on HGTV and other cable networks is more pervasive: It’s the intoxicating premise of house flipping shows.
These shows glorify and simplify the exhausting process of buying a run-down or undervalued home, investing enough time and money to make it nice, and selling it to buyers unwilling to do that kind of work themselves, all at a tidy profit. There’s both an art and a science to it, and your hard work and ability to see a diamond in the rough can pay off in the end.
All too often, house flipping is like any other get-rich-quick scheme: a scheme.
It’s an admittedly seductive narrative, but also a dangerous one. Flipping houses can work if you know what you’re doing and, crucially, enjoy the remodeling process. But all too often, it’s like any other get-rich-quick scheme: a scheme. And these shows condense and gloss over the potentially bankrupting or marriage-wrecking challenges amateur house flippers can face.
It’s impractical (or impossible) to squeeze all the unglamorous realities of home improvement into a 30- or 60-minute TV episode. That kitchen remodel that was finished in five days? It would take weeks in real life. And if the budget seems unrealistic, it probably is: Many shows receive free or discounted labor and materials from construction companies eager to get their names in front of viewers. Should the local market flatten before you finish, you can end up with beautiful home and no one to sell it to — as property taxes and utilities continue to pile up each month.
Plus, selling a home is expensive: Realtor commissions and other fees will eat up about 7% of your profits right off the bat. Not to mention that, if you flip a home within two years of purchasing it, you’ll owe capital gains taxes on the profit to boot.
The number of homes flipped totaled 193,009 last year, the most since 2006.
Still, with home values on a steady climb over the past five years, more people are taking a shot at flipping houses. More than 126,000 individuals or institutions flipped a house or condo in 2016, according to ATTOM Data Solutions — that’s the most since 2007. (That may sound positive, but housing trends and 2007 are generally not things you want to hear in the same sentence.) The number of homes flipped totaled 193,009 last year, the most since 2006. (Also not good.)
Why does that matter? A new working paper from the National Bureau of Economic Research suggests that house flipping among upper- and middle-class real estate investors may have triggered the 2007 housing crash — you know, the one that toppled the entire global economy.
Despite loose lending practices, subprime home buyers weren’t borrowing more during the boom; good-credit buyers were.
While Wall Street greed and irresponsible subprime borrowers have been popular scapegoats for the housing crisis, the study’s authors say Main Street greed may have played a bigger role than either. “Credit growth between 2001 and 2007 was concentrated in the prime segment, and debt to high-risk borrowers was virtually constant for all debt categories during this period,” the paper says. In other words, despite loose lending practices, subprime home buyers weren’t borrowing more during the boom; good-credit buyers were. “The rise in mortgage defaults during the crisis was concentrated in the middle of the credit score distribution, and mostly attributable to real estate investors.”
As Gwynn Guilford writes in Quartz:
Recall that back then the mantra was that housing prices would keep rising forever. Since owning a home is one of the best ways to build wealth in America, most of those with sterling credit already did. Low rates encouraged some of them to parlay their credit pedigree and growing existing home value into mortgages for additional homes. Some of these were long-term purchases (e.g. vacation homes, homes held for rental income). But as a Federal Reserve Bank of New York report from 2011 reveals, an increasing share bought with the aim to ‘flip’ the home a few months or years later for a tidy profit.
By 2007, investors accounted for more than a third of all mortgage debt among borrowers with fair or good credit, Guilford continues, and 43% among those with the best credit. “This set up a dangerous dynamic. The mortgages these prime borrowers were able to secure were much bigger than those taken out by poor homebuyers. Worse, speculators have less incentive to hold onto their extra homes than those who only own one home. So when the housing market started tumbling and the economy soon followed, they were much more willing to default and foreclose.” And default they did. The rest, as they say, is history.
So before you get yourself into lather thinking you’re going to buy an old dump, refinish the floors, slap on some new paint, and flip it for a profit, ask yourself whether you’re ready to spark a new financial crisis — whether it’s your own personal money pit or, perhaps, even a global housing meltdown.