Another big investor that pulls back from the housing market: it’s now a net-seller.
By Wolf Richter for WOLF STREET.
AI-powered home-flipper disruptor real-estate-tech company Opendoor Technologies had gone public via merger with a SPAC in December 2020. The SPAC was a creature of “SPAC King” Chamath Palihapitiya. All of his post-SPAC creatures have crashed. Investors buying tickets to his media-savvy hype-and-hoopla show lost tons of money, but it was a huge amount of fun and worth every penny. And the show goes on.
Opendoor decided to stay in the home flipping business after Zillow, seeing what was coming based on the vast amount of data it churns through, bailed out last year at a huge cost. Turns out home flipping profitably at a large scale is not a business model. It’s a costly dream. Zillow woke up and went back to its roots, and its stock crashed 84% from the hype-and-hoopla peak.
But Opendoor’s roots are in the noble activity of losing money in AI-powered home-flipping, and so it stuck with it and has been successfully losing a ton of money, $2.2 billion from 2019 through Q3 2022, including $928 million in Q3.
The loss in Q3 included an “inventory valuation adjustment” of $573 million, where it wrote down the value of the homes in its inventory, after prices have fallen since it had purchased the homes.
In other words, the company realizes that it will make a massive loss selling those homes because prices have dropped while it owned the homes – and because it’s AI-powered genius overpaid for the homes.
It sure is a lot easier to jump into the market and buy homes when price doesn’t matter, than selling homes when price does matter.
All this would have been a good thing back in the days when the free-money virus was still turning investors’ brains to mush, when losses were equated with success, and when bigger losses were equated with bigger successes.
Now the free-money virus is abating, interest rates are surging, mortgage rates have more than doubled, QT has started, and Opendoor is laying off 18% of its staff – 550 folks in all. “The reality is, we’re navigating one of the most challenging real estate markets in 40 years and need to adjust our business,” CEO and Co-Founder, Eric Wu, told his employees to explain the layoffs on November 2, after having lost money even in the hottest housing market ever a year earlier.
The company has $7.1 billion in debt, collateralized by the homes in its inventory, whose value it just wrote down by $573 million.
And the stock [OPEN] is getting annihilated, having long ago become one of the heroes in my pantheon of Imploded Stocks. Today the shares fell 5.5% to a new low of $1.64, and are down 96% from the high in February 2021 – that infamous February when the whole show started coming unglued. But there is a bigger impact on the housing market.
Opendoor is another huge investor in the housing market that is stepping back!
Opendoor is a huge buyer and seller in the housing market, and it’s getting crushed by falling home prices (wrote down the value of its inventory by $573 million in Q3), and it’s losing a ton of money (lost $928 million in Q3), and it’s slashing its home purchases, and it’s trying to reduce the homes in its inventory. It got battered, and it’s bleeding, and it’s trying to step back from the housing market.
- Home purchases cut nearly in half in Q3: It purchased 8,380 homes, down by 45% from a year ago (15,181 homes).
- Home sales jumped by 42%: In Q3, it sold 8,520 homes, up from 5,988 homes a year earlier — selling more homes than it purchased.
- 21% of its homes have been “on the market” for 120+ days from initial listing date.
But inventory barely declined, and there’s a long way to go. At the end of Q3, it had 16,873 houses in inventory that are now hanging over the market, and it has been trying to cut its inventory by slashing its purchases, but it was able to reduce it by only 3% (from 17,164 homes in inventory in Q3 2021).
In terms of the impact on the real estate market: Opendoor helped pump up prices with its algo-buying over the past few years, and now it sits on nearly 17,000 vacant houses that it must find buyers for, while at the time cutting its purchases, and becoming a net seller.
Opendoor has joined a slew of other big institutional investors that are stepping back from this housing market, each for their own reasons – Opendoor because its investors have run for cover, and it managed to lose money even in the hottest housing market ever (2021), and now the housing bubble has popped, and it’s losing huge amounts of money, so much money that there is simply no hope to turn this AI-powered home-flipping disruptor into a self-sustaining business.
And big institutional investors stepping back from this still ridiculously overpriced housing market adds to the demand-issues the market faces.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.