The rapidly cooling real estate market has caught the biggest buyers off guard

  • Demand for homebuyers is decreasing, creating spelling problems for companies that buy homes and sell them quickly.
  • Opendoor, Offerpad and Redfin plan to sell much of their inventory at a loss.
  • The effect is worse in markets like Phoenix which were iBuyer’s darlings at the start of the pandemic.

Julie Essig, a real estate agent in Boise, Idaho, often tells her salespeople to see first what they can get by concluding a deal with Opendoor, one of several real estate technology companies that quickly buys homes for cash and then sells them for a profit.

But he never advised one of his clients to accept an offer from the so-called iBuyer, until this spring, as home mortgage rates were marching higher.

In May, in what Essig described as the peak of Boise’s real estate market, one of his clients sold a home in Opendoor for $ 521,400, he told Insider. The company soon relisted the house for an additional $ 5,600.

“I was really surprised at how much they were offering. I would have listed it at $ 485,000,” Essig told Insider.

He suggested his client accept the offer as their take-home loot from the transaction, minus Opendoor’s fees, would be the same and they wouldn’t need to list the house extensively.

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 nearly $ 50,000 in July alone.

Essig has a front row seat in the rapidly cooling real estate market in Boise, which was recently identified by Moody’s Analytics as America’s most expensive market. The fallout from rising interest rates and excessive exuberance at the start of the pandemic assailed the equally hot city and localities that were favored by Opendoor and other iBuyers, who suddenly found themselves struggling to plug losses.

This correction, driven by mortgage rates that have risen at unprecedented speed, is palpable for executives at Opendoor and Offerpad. They downgraded their third quarter expectations during their earnings presentation this week. IBuyers bear the brunt of the collapse in house prices, as they have to take the risk of downside until they are able to resell the houses.

Company shareholders have seen a bit of “The Hunger Games” among iBuyers. Shares of Offerpad, a smaller iBuyer, plummeted more than 15% after its earnings report, while shares of Opendoor went up by an equivalent amount after delivering its financials for the period.

Now, iBuyers are planning to sell homes at a loss to get them off their balance sheets, a disturbing reminder of the behavior that sank Zillow’s iBuying division last year, albeit not to the same scale or for the same reasons.

What goes up must come down

The pain is not felt evenly across the country or in iBuyers wallets.

“The markets that have experienced the greatest rates of price appreciation are the ones that have suffered the most impact,” said Brian Blair, CEO of Offerpad, as he reported the company’s second quarter earnings.

Blair said the company was “temporarily slowing acquisitions” in markets like Phoenix due to recent volatility. You have identified these types of markets as the main source of the company’s $ 21.2 million in depreciation related to house prices from April to June.

Opendoor is seeing the same dynamic

Daniel Morillo, Opendoor’s Chief Investment Officer, said the company’s East Coast markets are doing well, particularly in the Southeast and Florida. Central markets are more of a mixed bag, he said, and Western markets like Phoenix; Las Vegas; Sacramento, California; and Tucson, Arizona are “a little more challenged”.

Rapid change in the market surprises iBuyers

iBuyers like Opendoor and Offerpad are bracing for a slowdown – after all, record transaction volumes and home price appreciation might not last forever. But they didn’t expect how quickly the market would cool, she told analysts Carrie Wheeler, Opendoor’s chief financial officer, during the earnings call.

That rapid shift in the market left iBuyers holding the stock on the homes they bought a few months earlier. Redfin’s iBuying business, a real estate brokerage with lower fees than traditional ones, is likely to suffer a loss on homes purchased in April and May after accounting for the costs of holding, selling and repairing, he said. its CEO, Glenn Kelman during the company’s earnings call this week.

June and July are less of a concern, Kelman said, as the company bought fewer homes in those months and paid less for them.

Those losses “will not be enough to sink our battleship,” said Kelman, expressing his belief that the iBuying business would survive this transition period.

“Our forecast assumes that house prices will continue to decline moderately throughout the remainder of 2022, but we still expect our real estate division to earn a significant gross profit for the full year,” Kelman told analysts on the phone call. .

Kelman acknowledged that iBuyers were playing a role in the rapid cooling of the housing market. In 2017, the fraction of inventory sold by iBuyers, home builders and other institutions was 27%. That figure is now nearly 35 percent, Kelman said. Unlike average homeowners, these types of sellers are quick to cut prices when homes aren’t selling, he added.

“iBuyers rates the listing below any current comparable and rates it even lower if it doesn’t receive an offer on opening weekend,” said Kelman. “This makes the market corrections sharper, but perhaps even shorter. The good news is that buyers are already responding to falling prices and mortgage rates.”

A short market correction would be good news for Offerpad and Blair, who said a buyer’s market is better for iBuyers. The challenge is the transition period.

“The hardest place to be is when you go from the seller’s market to the buyer’s market,” said Blair. “That transition period at its peak, that’s where it gets foggier than ever. And that’s exactly where we’re in this cycle right now.”

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