Housing prices in all 20 major US cities have been rising at the fastest pace since 2014. A red hot market has lured house flippers who are pocketing record profits.  

Research firm Attom Data Solutions' latest note specifies homes flipped in 2020 generated a gross profit of $66,300 nationwide (the difference between the median sales price and the median amount initially paid by investors). 2020's gross profits were up 6.6% from a year earlier and were at the highest levels since the housing boom in 2005. 

Even with a red hot real estate market, flippers find they have to pay up for homes, which is compressing their return on investment, averaging 40.5% in 2020 compared with 41.5% in 2019. Average home prices across the 20 cities rose a stunning 10% year-over-year in December, its fastest acceleration since 2014.

On top of soaring home prices, flippers found out everything from lumber to copper prices increased build costs and squeezed margins. The National Association of Home Builders recently said soaring lumber prices added an extra $24k in costs to builders for the average home in 2020. 

Even though margins are compressing, profits on flips remain strong, as second-tier regional banks are handing out fix-and-flip loans at increasing paces. Small banks, many of which most people have never heard of, such as Cutter Hill Capital, Builders Capital, and Temple View Capital, have seen a surge in loan originations for flipper loans. The average annual rate on a fix-and-flip loan is around 7.09%, about twice the level on a 30-year mortgage. These loans are short-term and are often measured in months than years - making them appealing for banks and other institutions attempting to obtain yield.