When the Housing Market Cools Off, This Tech Stock will Heat Up

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Ask anyone who has bought a house in the last year what their experience was like and they will probably describe something similar to the Wild West. Stories of people offering well over the asking price without ever seeing the house are fairly common. Contingency-free offers are almost necessary in order to score a house of the buyer’s dreams. All of these factors compound to make business for Opendoor (NASDAQ:OPEN) difficult. 

A successful transaction in 2018

In normal markets, some sellers need proceeds from the house sale as quickly as possible. For example, take Olivia and Phil who live in Atlanta. In July of 2018, Olivia receives a fantastic job offer in Denver, but it’s unexpected. She takes the offer and the family moves to Denver. They want to purchase a home in Denver but need to transfer the equity they’ve built in their Atlanta home to fund a down payment on the Denver home. Opendoor steps in, makes them a discounted offer and then takes ownership of the Atlanta property. 

After necessary repairs and upgrades, Opendoor lists the house and then sells it to another buyer. Meanwhile, Olivia and Phil are free from all of the labor and have already used the funds from the Opendoor transaction to buy their new home. 

Image source: Getty Images.

A missed opportunity in 2021

Now, if Olivia and Phil receive that discounted offer in 2021, would they take it? They know the housing market is crazy and homes that are listed on Thursday have well over a dozen offers by Sunday. Additionally, these offers are contingency-free and are over their asking price. The discounted offer from Opendoor looks less and less appealing. 

Additionally, Opendoor itself doesn’t want to compete in this market because it knows it is likely overpaying for a property it will soon flip. Current buyers know pricing is inflated, but if they own the home for many years, it won’t matter. 

When will the advantage come back?

One major statistic that will signal a return to normal for Opendoor’s home buying business is median days on market for a house. This is a very seasonal metric, as homes generally sell quicker in the Summer than in the Winter. However, with days on market down over 35% from the previous years, houses are clearly selling much faster. When this number returns to normal, desperate sellers will turn to Opendoor for a quick sale.

Median Days on Market in the United States

July 2017

July 2018

July 2019

July 2020

July 2021

66.5

59.5

59.5

59.5

38

Opendoor is ready to strike

During the seller’s market craze, Opendoor has not sat idle. Instead, they took this time to continue to expand their operations into 18 new housing markets since the end of 2020. To put this number into context, they were only in 21 at the end of 2020. More opportunities will arise from these new locations, which will further drive Opendoor toward profitability. 

During the second quarter of 2021, Opendoor proved they will adapt even though the housing market is hot. They purchased nearly 8,500 homes in the quarter alone, more than the previous four quarters combined. This will lead to increased revenue which can be used to expand into more markets or purchase even more houses. 

Their contribution margin, which subtracts selling and holding costs from gross margin to give a more accurate view of the cost of their product, was up over 500%. This allowed Opendoor to turn an adjusted profit, to which investors responded favorably — sending the stock price up 15% in a single day. 

Since its most recent earnings, the stock remains down over 50% from its 52 week high. With a more reasonable housing market in the future, and Opendoor adapting to the current market, investors should have no reason to doubt this company despite its recent lackluster stock performance.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.