Flippers rejoice! The Federal Housing Administration (FHA) will continue supporting your churn-and-burn efforts through 2012.

Prior to February 2010, the FHA effectively suppressed damaging speculator influence on prices in the housing market by prohibiting speculators from reselling single family residences (SFRs) to FHA-backed buyers within 90-days of the speculator’s original acquisition. The FHA banned speculator access to buyers with FHA-insured, purchase-assist loans in order to quell the flipping frenzy which was ravaging the mortally wounded real estate market in 2008 and 2009. [For more information on the effect of speculators on a recovering real estate market, see the August 2010 first tuesday article, Speculations on speculator suppression.]

In early 2010, the FHA lifted the ban on speculators, allowing homebuyers to use FHA-guaranteed loan money to purchase a home regardless of its previous sale date and the price on that sale. Although this speculator reprieve was set to expire in 2011, the FHA continues to allow the quick turnover of flipper-owned properties into 2012. [To read first tuesday’s response to FHA’s initial suspension of the 90-day rule, see the January 2010 first tuesday article, Reduced FHA standards will encourage speculator interference in the market.]

first tuesday take: Speculators pose a systemic danger to a recovering housing market creating artificial demand, which temporarily drives sales volume and prices upward. Accordingly, the FHA is ill-advised to continue allowing flippers free rein in this still-recovering California real estate market — simply because speculators are good for lenders’ real estate owned (REO) liquidity does not mean they are good for California’s real estate market.

The FHA has in the past rightly limited speculators from selling flipped homes in a quick resale to FHA-backed homebuyers. Hungry to make quick cash by exploiting the low prices born out of the market implosion of 2008, by 2009 speculators with aggressive bids created undue competition and elbowed-out ready and willing buyers just as they began returning to the market. [For more information on the recent scarcity of qualified borrowers in the real estate market, see the July 2010 first tuesday article, Low-ball offers slow housing sales.]

The typical speculator, interested in simply buying low and selling high, acts as a parasitic middle-man during real estate market recoveries. During recovery periods as we are now experiencing, speculators serve only to artificially inflate sales volume and prices and, in turn, pose unnecessary barriers to buyer-occupants returning to the single family residence (SFR) market.

The crux of this issue is real estate owned (REO) inventory. REO inventory in the SFR market is presently declining, but remains nearly six times higher than that of a healthy market. The FHA is rightly concerned REOs will continue to flood the market, negatively affecting prices and sales volume well into 2012. However, the answer to liquidating California’s REOs during a recovery cycle is not the speculator, who will take these easy marks and turn them into profits that in no way benefit the real estate market. Californians need jobs, lots of jobs, so Californians can qualify to buy a home. [For a clear picture of California’s REO inventory, see the January 2011 first tuesday Market Chart REO resales in California.]

Since the FHA has given up the ghost of speculator suppression in the interest of artificially spurring sales volume and prices, California’s real estate agents and buyers need not concern themselves with the seller’s acquisition date of the property in question. However, if the home was purchased by the current owner within the past several months (as shown in the ubiquitous property profile), the buyer needs to be advised of this fact as a flipper may be afoot, artificially inflating the price to the buyer’s detriment.

Given the FHA is no longer concerned about the speculator effect on pricing, selling agents must inform their buyers they are dealing with a speculator. Negotiations must be made with the speculator’s status in mind to avoid squandering hard-won purchase-assist funding by padding a speculator’s pockets with any sudden increase in the resale price of the property over a short period of time. [For more information on the agent’s role in transactions involving speculators, see the July 2010 first tuesday article, Agency duties: the flipper’s quandary.]

Re: “FHA extends suspension of ‘anti-flipping’ rule for another year” from the Los Angeles Times