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Opendoor's Business Model is Flawed

March 06, 2023

Rise and shine! It's a new day and The Shaker is here to serve you the best mix of residential real estate news. Yummy yummy.

THE BIG SPLASH

Opendoor's Business Model is Flawed

What's important to know:

Online home flipper Opendoor has suffered declining profits and deteriorating gross margins as the US housing market has stagnated and even declined in some regions, following a period of soaring prices that was driven by the Covid-19 pandemic.

  • Q4 2022 earnings were down 25% YoY to $2.86bn, with gross margins falling from 7.1% to 2.5%.

  • The company made just $71m in gross profit, which failed to cover the $113m in interest expenses from the debt it uses to finance home purchases.

  • Opendoor’s net loss for Q4 was $399m, and it lost $1.35bn over the whole of 2022, while generating only $667m in gross profit.

  • The only path forward for Opendoor is to pivot its business model.

  • The company has over $1bn in cash on its balance sheet and $4.5bn in home inventory it can liquidate.

A SCOOP OF MARKET DATA

The U.S. Housing Market is Poised for a Recession

  • Improved economic data means the Federal Reserve will likely hold the federal funds rate higher for longer than previously expected, leading to a sharp rise in average 30-year fixed mortgage rates.

  • Mortgage purchase applications—a leading indicator for home sales volumes—has started to fall again. Indeed, this week’s seasonally adjusted Mortgage Purchase Application Index came in at the lowest level since 1995.

  • The US housing market is at risk of slipping into an extended period of sluggishness due to the rise in mortgage rates.

  • While spiked mortgage rates have translated into a historic pullback in home sales, it hasn't translated into a house price crash. Dallas Fed economists expect the U.S. housing market to continue passing through a "modest" home price correction. However, if the Federal Reserve were to get even more aggressive in its inflation fight, it could create a "severe" correction in national home prices.

  • The economic shock from this latest mortgage rate jump means the U.S. housing market slump will continue, and could even deepen, risking pushing the U.S. economy into a recession.

A SCOOP OF ANALYSIS

The US real estate industry lacks diversity

  • According to a new report, the US real estate industry lacks diversity, as only one of the 383 top developers who generate over $50m in revenue is Latino, and none are Black.

  • The study focused on Black and Latino developers due to the theme of their lack of access to capital. This leads to a lack of representation, as these groups are often unable to access seed money to get started.

  • A racial wealth gap and discrimination in seeking loans have contributed to the lack of representation, and the report highlights that this also affects economic growth and has the most significant impact on communities.

  • Of the $82tn invested in venture capital and private equity, less than 1.3% is invested in firms run, owned, or founded by women and people of color combined.

A SCOOP OF CRAZINESS

The World's Most Expensive Home is On The Market

The most expensive home in the world is up for sale and it's located in London's Regent's Park. The property, called The Holme, is a two-story mansion that dates back to 1818 and sits on four acres.

  • The Holme is listed for ÂŁ250 million ($298.5 million), making it the most expensive home in the world and the UK.

  • The mansion has 40 bedrooms and over 29,000 square feet of living space, as well as eight garages, a tennis court, a library, a sauna, and a grand dining room.

  • The property is known as "the White House in Regent's Park" and was previously owned by the Saudi royal family before being repossessed due to an expired loan.

  • The sale of The Holme is expected to pay off a $180 million loan owed by the Saudi royal family, which is reportedly the highest-valued asset in their real estate portfolio.

  • The property is being listed by Beauchamp Estates and Knight Frank, and is expected to generate significant interest from buyers all over the world.

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