- Demand from homebuyers is declining, creating problems for businesses that buy homes and sell them quickly.
- Opendoor, Offerpad and Redfin expect to sell much of their inventory at a loss.
- The impact is worst in markets like Phoenix, which was an iBuyer darling early in the pandemic.
Boise, Idaho real estate agent Julie Essig often tells sellers to see what they get by signing a deal with Open Door first. profit.
But she told one of her clients, so-called eye buyer — until this spring, as mortgage rates were rising.
In May, which Essig described as the peak of Boise’s real estate market, one of her clients sold a house to Opendoor for $521,400, she told Insider. The company soon after, and she relisted the house for $5,600.
“I was really surprised by the amount they offered. I would have put it on the list for $485,000,” Essig told Insider.
She suggested that the client take the offer because the takeaway from the transaction would be the same minus Opendoor’s fees, and the house wouldn’t have to be listed broadly.
More than 45 days later, the property is still on the market, priced at $459,000 after four price cuts since early June. Prices he dropped about $50,000 in July alone.
Essig is at the forefront of the rapidly cooling Boise housing market. America’s most expensive marketThe effects of rising interest rates and over-enthusiasm early in the pandemic hit cities and similarly hot regions that were favorites of Opendoor and other iBuyers, suddenly finding themselves desperate to stem losses.
This fix Mortgage rates rise at unprecedented speed, is evident to the executives who lead Opendoor and Offerpad. They cut their third-quarter forecasts on their earnings call this week. iBuyers bear the brunt of plummeting home prices because they have to bear the downside risk until they can resell their homes.
Company shareholders have seen a bit of a “hunger game” among iBuyers. The stock of his smaller iBuyer, his Offerpad, plummeted by more than 15% after he reported earnings, while Opendoor’s stock surged by the same amount after the earnings call in that period.
what rises must fall
The pain is not felt evenly across countries or across iBuyers’ portfolios.
While reporting on the company’s second-quarter earnings, OfferPad CEO Brian Blair said, “The markets with the highest rate of price appreciation have been hit the hardest.”
Blair said the company is “temporarily delaying acquisitions” in markets such as Phoenix due to recent high volatility. He identified this type of market as the primary cause of the company’s $21.2 million home-price-related write-downs from April through June.
Opendoor sees the same dynamics
Opendoor’s chief investment officer, Daniel Morillo, said the company’s East Coast markets are doing well, particularly in the Southeast and Florida. Central markets are more mixed, he said, as are western markets like Phoenix. Las Vegas; Sacramento, California; Tucson, Arizona, is “a little more difficult.”
Rapid Market Changes Surprise iBuyers
iBuyers like Opendoor and Offerpad are gearing up for a slowdown. record trading volume When rising house prices It couldn’t last forever. But Open Door’s chief financial officer, Carrie Wheeler, told analysts on an earnings call that she didn’t expect how quickly the market would cool.
This rapid change in the market has left iBuyers behind homes they purchased just months ago. Redfin’s iBuying business, a real estate broker with lower fees than traditional brokers, is likely to lose money on homes purchased in April and May when maintenance, sales and repair costs are taken into account, he said. CEO Glenn Kelman said. During this week’s company earnings report.
June and July are less of a concern, according to Kelman.
These losses “are not enough to sink our battleships,” said Kelman, expressing his belief that the iBuying business will survive this transition.
“While we expect home prices to continue to moderately decline through the second half of 2022, we still expect our real estate sector to achieve significant gross margins for the full year,” Kellman said on a conference call with analysts. ‘ said.
Kelman acknowledged that iBuyers are playing a role in the rapid cooling down of the housing market. In 2017, he had 27% of his inventory sold by iBuyers, homebuilders, and other agencies. Kelman said that number is now nearing 35%. He added that unlike the average homeowner, these types of sellers quickly drop prices when a home isn’t selling.
“iBuyer is below the price on all current comparable listings and will drop more if there are no offers in the first weekend,” said Kelman. “This will make the market correction sharper, but perhaps also shorter. The good news is that buyers are already coping with falling prices and mortgage rates.”
A short-term correction in the market would be good news for Offerpad and Blair, who said a buyer’s market favored iBuyers. The challenge is the transition period.
“The hardest part is when you move from a seller’s market to a buyer’s market,” Blair said. “The transition period at its zenith has never been more foggy, and this is exactly where we are in this cycle right now.”