Much recent news in real estate has centered on home prices, which appear to still be rising. But what about the profits from home sales?
The latest Year-End U.S. Home Sales Report from ATTOM paints a less rosy picture of what’s going on in the real estate market. In fact, it’s showing that home sales profits dropped for the first time in a decade in 2023. So what are the figures, and what do they mean for investors?
The Numbers and a Bit of Context
First, the figures are by no means terrible. The ATTOM data shows that home sellers generated, on average, 56.5% return on investment (ROI), or $121,000 in profit on a typical home sale. This is down from 59.8%, or $122,600 in 2022.
Is this a concerning trajectory? The answer is not really if we put it in perspective of pre-pandemic home sales profit figures. ROIs of close to 60% are pretty extraordinary if we consider that the 2023 percentage was more than double what it had been just five years earlier.
If we look even further back to the dark post-2008 years, negative ROIs defined home sales between the financial crash and 2013. If you were selling a home in, say, 2011, you likely lost money.
With this historical perspective in mind, the current dip in home sales profits really begins to seem pretty insignificant—especially given the tough year the real estate market had following the by-now-infamous spike in mortgage interest rates. Rob Barber, CEO at ATTOM, commented in a press release that 2023 was ‘‘another very good year for home sellers across most of the United States.’’
Having said that, Barber added, ‘‘The market definitely softened amid modest price gains that weren’t enough to push profits up higher after a long run of improvements.‘’
The home sales environment certainly isn’t the same now as it was in 2021, when home sellers suddenly began seeing ROI figures of 50%, as opposed to 36% in 2020. The market was recovering steadily from the post-2008 slump, with profits increasing at predictable rates until the pandemic. And then they shot through the stratosphere.
Undoubtedly, this golden era of unprecedented profits in the real estate sector is over, at least for a while. Barber recommends tempering expectations in 2024, which is likely to bring very similar market behavior to 2023, adding:
‘’In 2024, the stage seems set for more small changes in prices, as well as seller gains, given the competing forces of interest rates that have headed back down in recent months and home supplies that remain tight, but homeownership costs that remain a serious financial burden for many households.”
In other words, it’s still a great time to invest in real estate, with most of the U.S. offering investors the opportunity to make a substantial profit on a home sale. ATTOM’s regional breakdown of the home sales profits data reveals that profit margins closely follow the regional market shifts that have been shaping U.S. real estate in the past two years.
A Look at Regional Trends
Unsurprisingly, many of the pandemic-era boom areas are now experiencing substantial home sales profit declines. These cities all experienced huge influxes of buyers during and immediately after the pandemic:
- Austin, Texas (ROI down from 67.2% to 46.2%)
- Phoenix (down from 79.3% to 60.6%)
- Reno, Nevada (down from 80.6% to 64.5%)
- Salt Lake City (down from 68.3% to 52.2%)
These were affordable cities with strong economies that attracted professionals who wanted better value for their money when buying a house. Invariably, though, their popularity became their downfall. With huge demand came unsustainable home price increases, which are now manifesting as decreasing sales and decreasing profits.
On the other hand, the Midwest and Northeast are two areas offering investors increasing profit margins despite everything the housing market went through in 2023. The biggest ROI increases were seen in these cities:
- Scranton, Pennsylvania (ROI up from 75.1% to 89.6%)
- South Bend, Indiana (up from 53.6% to 66.5%)
- Hartford, Connecticut (up from 53.2% to 65.8%)
- Rockford, Illinois (up from 48.8% to 57.8%)
- Rochester, New York (up from 53.8% to 62.8%)
The Midwestern cities of Cincinnati, Cleveland, and Milwaukee are also safe bets for investors, with all three seeing ROI gains in 2023.
The large cities with the biggest cities were San Francisco (ROI down from 92.7% to 79.5%) and Las Vegas (down from 74.3% to 61.8%). They’re still great places to invest in, though, with very high profit margins—just not the crazy high levels of 2022.
In fact, taking a final look at all the data is a reassuring experience: Even the cities with the largest declines are still offering opportunities to generate healthy profits from selling real estate.
In terms of profits in purely monetary terms rather than ROIs, the West Coast will still give you the largest profits, with San Jose emerging as the leader. Selling a home in this California city will generate, on average, a whopping $698,000. This figure, of course, reflects the overall high prices in the area, with an average home value of $1,322,389. By contrast, selling in the Midwestern market of Peoria, Illinois, will only generate $35,000 on average—understandably so, given the average home value of $122,900.
The Bottom Line
All these figures really demonstrate that the U.S. offers plenty of opportunities for investing in real estate for people with varying financial capabilities. Research your local market, see what you can afford and what ROI you’ll get there, and learn to add value for buyers. By following these steps, you will make a profit that will be in line with the current home prices and ROIs for the area.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
