Opendoor Crashes Again!

Whats up everyone

Just last week Opendoor announced it would lay off another 560 staffers, or 22% of its remaining workforce.  

The company’s stock, which at one time was over $34 a share closed at $1.56 last Wednesday.

This is a direct result of the sharp housing correction parts of our country are experiencing- namely in the west.  

But how did things go so dreadfully wrong for Opendoor and why could Zillow have prevented Opendoor’s demise?

Let’s take a look at Lance Lambert’s article in Fortune to see how Opendoor’s annihilation could have been prevented. 

Let’s dive right in

In order to best understand what happened, let’s rewind to Spring of 2021.

At that time, the housing market was in full boom mode. Opendoor was one of several ibuying companies. You had RedfinNow, Offerpad and Zillow to name a few. They would buy homes, do a quick fix and then resell them for a profit. 

Or at least that was the plan.

Opendoor in particular,  went from a startup in 2014 to No. 425 on the Fortune 500 in 2022. 

It worked like this: Through its online platform, Opendoor makes speedy offers to clients—who are often selling homes in need of some tender loving care—in exchange for a “service fee.” The company then makes the needed repairs and flips the home back onto the market for a quick buck.

Fast forward to the Fall of 2021. 

The housing market was still doing well, but there were already mumblings of the Fed Reserve stepping in to raise interest rates which would then affect mortgage rates.

Zillow admitted to having overextended their ibuying program. They had too many houses and not enough boots on the ground to fix their homes to resell them, so in October of 2021, they decided to pause their home flipping business.  

Just weeks later, Zillow shut it down completely and laid off 2000 workers while scrambling to off load its inventory. 

It turns out that Zillow’s algorithm was having issues predicting future price appreciation, which led to overpaying for properties in some cities, leaving the company dangerously exposed to a housing market correction.

As Zillow exited its home flipping program, Opendoor didn’t seem too worried: On Nov. 2, 2021, the same day Zillow announced it would permanently exit iBuying, shares of Opendoor closed at $21.12. 

In hindsight, maybe Opendoor investors should have paid more attention. 

In late November 2021, Fed Chair Jerome Powell announced it was ready to combat inflation by raising interest rates. Everyone knew that the goal was to calm the housing market down and raising mortgage rates was the fastest way to do that.

Lambert writes: Nevertheless, iBuyers like Opendoor and RedfinNow kept buying up homes in late 2021, and homebuyers kept bidding up home prices. The music kept playing, but it was about to stop.

Cut to the First quarter of 2022, and the housing market goes insane. I’ve never seen anything like it. I had one listing get 16 offers and sell $400,000 over asking. And it was priced at $895k!

In fact, U.S. home prices as measured by the Case-Shiller National Home Price Index in March 2022 notched a record year-over-year jump of 20.8%.

And then, the music stopped. 

Interest rates started to go up. Each time the Fed raised rates, mortgage rates went up. They started at 3.11% Jan 2022 and went as high as 4.67% by the end of March.

Housing prices started to stutter in some markets, but it wasn’t until June of 2022 when mortgage rates topped 6%, that some markets really started to correct. 

Meanwhile, Opendoor kept buying homes.

Markets that boomed the most, started correcting the fastest, like Phoenix, Boise and Reno, all of which had a big Ibuyer presence from companies like Redfin and Opendoor.

So, what did they do? 

They started slashing their home prices.

“When the shiitake mushrooms hit the fan, you [investors] want to get out first. The way to do that is to figure out where the lowest sale is, and be 2% below that. And if it doesn’t sell in the first weekend, move it down [again],” Redfin CEO Glenn Kelman told Fortune last fall. 

In November, Redfin joined Zillow in shutting down its home flipping business. They ended up laying off 13% of its staff. 

“To prosper in a housing downturn that could last at least through 2023, we have to simplify our business,” a Redfin spokesperson said.

Then in December, Opendoor cofounder Eric Wu announced he would step down as CEO. Carrie Wheeler, Opendoor’s CFO, took over.

Let’s take a look at their financials as reported in the article 

Opendoor’s revenue grew 94% to $15.6 billion in 2022, as did its losses, going from $662 million in 2021 to a $1.4 billion loss in 2022. 

Even more glaring, its adjusted net loss climbed 394% from a $116 million loss in 2021 to a $574 million loss in 2022.

In total, Opendoor sold 39,183 homes in 2022, up from 21,725 homes in 2021 and 9,913 homes in 2020. 

Of course, ramping up just as the national housing market was peaking proved costly.

The Fed Reserve continued to hike up rates at an alarming speed and Opendoor couldn’t keep up.

“We constantly track macroeconomic and housing conditions and adjust our strategies accordingly, but we did not predict the speed of decline in home price appreciation and transaction volumes,” wrote Opendoor in its shareholder letter published in February. 

So now they are chasing the market, trying to offload their inventory before prices go down even more. 

Back in April of 2022, Opendoor bought a home in Las Vegas for $420,900, fixed it up and then put it back on the market in May for $480,000. It finally sold for $346,000 in January 2023.

According to a Goldman Sachs report in February, Opendoor expects to sell 85% of the homes they bought at the peak of the market last year by the end of the first quarter this year.

In that same report, Goldman Sachs reiterated its sell rating on Opendoor and reduced its 12-month share price target to just $1.

But not everyone is so bearish about Opendoor. 

Jay McCanless, a senior vice president of equity research at Wedbush, told Fortune that he thinks the U.S. housing market is now “through the worst of it” and the sharp house price declines are over. 

“The lack of inventory and strong demographics puts a floor on how far home prices can fall.”

The Housing market has already started to bounce back in some markets. Even in the most corrected housing markets out west, price cuts have started to calm down.

The improved housing market in 2023, coupled with Opendoor’s “strong cash position,” is why McCanless has a $3 share price target on Opendoor. That said, that figure pales in comparison to the $34 share price Opendoor had back at its peak in 2021.

So what’s next for Opendoor? 

The bigger question is what’s next for the housing market? Will it continue to correct or are we already in recovery/rebound mode?

Honestly, it depends on where you live. Where I am in the DC area, the housing market is hot again. Houses are going in multiple offers and getting bid above asking. 

There just simply is not enough inventory. 

What’s happening where you live? Comment below. 

Opendoor isn’t the only company with recent layoffs. 

Geekwire reported that Redfin recently laid off 201 employees, or 4% of its workforce, marking its third round of cuts in less than a year. 

If you want to know more about it, check out this video.