- Homebuyer demand is dropping, spelling trouble for companies that buy homes then sell them quickly.
- Opendoor, Offerpad, and Redfin expect to sell much of their inventory at a loss.
- The effect is worst in markets like Phoenix that were iBuyer darlings earlier in the pandemic.
Julie Essig, a real-estate agent in Boise, Idaho, often tells her sellers to first see what they can get by cutting a deal with Opendoor, one of several property-technology companies that buy up homes quickly with cash and then sell them for and profit.
But she’s never advised one of her clients to take an offer from the so-called iBuyer — until this spring, as home mortgage rates were marching higher.
In May, at what Essig described as the peak of Boise’s real-estate market, one of her clients sold a home to Opendoor for $521,400, she told Insider. The company soon relisted the home for $5,600 more.
“I was really surprised at how much they were offering. I would have listed it at $485,000,” Essig told Insider.
She suggested that her client take the offer since their take-home haul from the transaction, minus Opendoor’s fees, would be the same and they wouldn’t need to widely list the home.
More than 45 days later, the property remains on the market, priced at $459,000 after four price cuts since the beginning of June. The price dropped almost $50,000 in July alone.
Essig has a front-row seat to the rapidly cooling housing market in Boise, which was recently identified by Moody’s Analytics as America’s most overpriced market. The fallout of rising interest rates and excessive exuberance earlier in the pandemic has beset that city and similarly hot locales that were favorites for Opendoor and other iBuyers, which have suddenly found themselves scrambling to stanch losses.
This correction, driven by mortgage rates that have increased at unprecedented speeds, is palpable for executives leading Opendoor and Offerpad. They downgraded their expectations for the third quarter during earnings presentations this week. iBuyers bear the brunt of plunging home prices, as they have to carry the downside risk until they’re able to resell the homes.
Shareholders in the companies saw a bit of “The Hunger Games” among iBuyers. Shares of Offerpad, a smaller iBuyer, plummeted more than 15% after its earnings report, while Opendoor’s stock surged by an equivalent amount after delivering its financials for the period.
Now, iBuyers are planning to sell off homes at a loss to get them off their balance sheets, an eerie reminder of the behavior that sank Zillow’s iBuying division last year, though not at the same scale or for the same reasons.
What goes up, must come down
The pain isn’t felt evenly across the country or across the iBuyers’ portfolios.
“The markets that have seen the greatest rates of price appreciation are being impacted the most,” Offerpad CEO Brian Blair said as he reported the company’s second-quarter earnings.
Blair said the company was “slowing acquisitions temporarily” in markets such as Phoenix because of the recent volatility. He identified these sorts of markets as the main source of the company’s $21.2 million in home-price-related write-downs from April to June.
Opendoor is seeing the same dynamic
Daniel Morillo, Opendoor’s chief investment officer, said the company’s East Coast markets were performing well, particularly in the southeast and Florida. The central markets are more of a mixed bag, he said, and Western markets like Phoenix; Las Vegas; Sacramento, California; and Tucson, Arizona, are “a bit more challenged.”
A quick shift in the market takes iBuyers by surprise
iBuyers like Opendoor and Offerpad have been gearing up for a slowdown — after all, record transaction volumes and home-price appreciation couldn’t last forever. But they didn’t anticipate just how fast the market would cool, Carrie Wheeler, Opendoor’s chief financial officer, told analysts during the earnings call.
That rapid shift in the market has left iBuyers holding the bag on homes they purchased just months earlier. The iBuying business of Redfin, a real-estate brokerage with lower fees than traditional brokerages, will likely take a loss on homes it purchased in April and May after factoring in holding costs, selling costs, and repairs, its CEO, Glenn Kelman, said during the company’s earnings call this week.
June and July are less of a concern, Kelman said, because the company bought fewer homes those months and paid less for them.
Those losses “won’t be enough to sink our battleship,” Kelman said, expressing the belief that the iBuying business would weather this transition period.
“Our forecast assumes home prices keep declining moderately through the rest of 2022, but we still expect our properties division to earn a significant gross profit for the full year,” Kelman told analysts during the call.
Kelman acknowledged that iBuyers were playing a role in the housing market’s speedy cooldown. In 2017, the fraction of inventory that was sold by iBuyers, homebuilders, and other institutions was 27%. That figure is now nearly 35%, Kelman said. Unlike average homeowners, these types of sellers are quick to cut prices when homes aren’t selling, he added.
“iBuyers price the listing below every current comparable and price it even lower if it doesn’t get an offer in the opening weekend,” Kelman said. “This makes market corrections sharper but maybe also shorter, too. The good news is that buyers are already responding to drops in prices and mortgage rates.”
A short market correction would be good news for Offerpad and Blair, who said a buyer’s market was better for iBuyers. The challenge is the transition period.
“The hardest place to be is when it transitions from a seller’s to a buyer’s market,” Blair said. “That transition period at the very top, that’s where it gets more foggy than ever before. And that’s exactly where we’re at in this cycle right now.”