Yahoo Finance Crash of the iBuyers: Housing Markets Feel the Hangover
(1:00) - iBuyer Impact On the Housing Market
(8:00) - Are the iBuyers Over and Done?
(11:35) - Home Builder Trends for Investors
(23:50) - Impact of Rising Interest Rates on New Buyers/Investors?
(33:15) - Finding Trends: Where Should Investors Research RE Markets?
(40:45) - Where's the Housing Market Heading in 2023?
Podcast@Zacks.com
Welcome back to Mind Over Money. I’m Kevin Cook, your field guide and storyteller for the fascinating arena of behavioral economics.
If you bought or sold a house during the pandemic shutdown, you are intimately familiar with the surge in home prices that seemed driven by the combo of “work-from-anywhere” freedom and rivers of stimulus money floating by.
I remember talking to one of my 20-something sons about looking for his first house in Q1 of 2020, with many starter/fixers available near $100K in our area.
That completely changed a year later when the same houses were going for double!
Another factor of this surge that I did not understand at the time was the participation of the iBuyers. I knew that PE firms like Steve Schwarzman’s Blackstone had been in the market since 2012.
But I didn’t know the extent of house buying programs from Zillow Z, Redfin RDFN, and another company called Opendoor OPEN until Zacks resident real estate expert Tracey Ryniec gave us an internal presentation in November.
I didn't even know that the "i" in iBuyers stood for instant.
Since then, I have become vastly interested in real estate investing in my neck of the woods in Northern WI. Since I missed the pandemic bubble, I want to be ready to scoop some bargains as the market comes down after the bubble pop.
So I wanted to bring Tracey on to discuss all things housing. We’ll talk about the death of the iBuyers and the current state of the market overall -- since she listens to all the major homebuilder conference calls too, like Toll Brothers TOL, and has her finger on the pulse of the housing markets, of which there are hundreds.
I start by asking Tracey if the iBuyers are gone and we can get back to normal markets. She basically concludes that the party is indeed over as prices peak, interest rates prohibit speculation, and big chunks of new buyers are priced-out of the market.
And while the iBuyers may have helped many homeowners, it's also possible that they distorted the market with their cash piles and forced other less-financed investors out of the housing market.
In the end, Zillow and Redfin have bowed out as they can't make a sustainable business out of overpaying for homes any longer.
From a “Sellers’ Market” to How Low Will They Go?
Existing home sales declined 1.5% in December to a 4.02 million annual rate, beating the consensus expected of 3.95 million. Sales are down 34.0% versus a year ago, and December marked the lowest level of sales in over a decade.
An interesting anecdote Tracy shared after our interview was this Twitter post from appraiser Ryan Lundquist who goes by @SacAppraiser…
Opendoor bought Zillow's last home in Sacramento and it's now pending
- Zillow bought $700K (11/2021)
- On market 119 days (canceled $624,900)
- Opendoor bought $354,500 (discounted price)
- Some improvements made
- Listed 90 days later $632,000
- Pending after 22 days
It looks like Opendoor may be the last one out to shut off the lights.
But another interesting player I didn’t know of is Offerpad OPAD, whose model evolved to give home sellers either a quick cash offer in a matter of days -- and a closing in a matter of weeks -- or a solid back-up offer even if they decided to still list with an agent on the MLS.
They even help home sellers move locally and bundle other home buying/selling services to ease the stress.
From their website “about” story…
After many years spent buying, selling, renting, and renovating nearly 100,000 homes across the country, Brian Bair and his executive team gained a deep understanding of the challenges people face when selling their homes.
They found that even successful sellers were overwhelmed by the stress of selling – trying to guess what their home would sell for, prepping for showings, negotiating a deal, finding movers, and waiting for a closing date. Why wasn’t there a better way?
Recognizing the industry was long overdue for a change and equipped with a wealth of first-hand knowledge, Brian and his fellow executives set out to offer something completely new. Their goal was clear: reinvent the home sale process and provide sellers with the convenience, control, and certainty they’d been lacking under the outdated system.
In 2015, Offerpad was born. Pairing ground-breaking real estate technology with fundamental industry experience, they created a platform where sellers could receive a strong purchase offer for their home, quickly contract and close, and avoid the hassles associated with traditional real estate selling.
Offerpad By the Numbers
I thought it would be interesting to dissect the business of one of the smaller players, who once claimed to be #2 in homes bought.
The company went public in December 2020 around $10. It now trades for under $1 and a market cap of $150 million.
I just went through their November investor presentation slide deck and found many interesting elements about the industry and their business model. First, they estimate that for a $2.5 trillion housing market, there is only 1% digital penetration.
One KPI (key performance indicator) Offerpad measures its success with is “time to cash,” or the number of days between the acquisition of a house and its eventual sale. Since 2017, they have dropped this metric by 43% from 133 days to just 76.
After doing $2.1 billion in home sales and services revenues in 2021, Offerpad expanded to a total of 29 markets across the West, South, Midwest and Southeast. They are projected to deliver topline revenues of $3.82 billion for 2022, representing nearly 85% growth.
But bottom line profits are expected to plummet 820% from a nickel last year to -$0.36 cents, with a record 3,600 homes sold in Q1’22 on operating expenses of only 6.4%. Profit margins have dropped considerably as Q3 saw 1,847 homes acquired and 2,280 homes sold for a net income loss of $80 million.
For their Q4, the company expected about 1,425-1,850 homes sold for between $500 and $650 million in revenue and an EBITDA loss of $40 to $60 million. Offerpad reports earnings in late February.
Be sure to check out the Mind Over Money podcast interview with Tracey where we also look at the overall housing market and its outlook for 2023.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader portfolio.
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Toll Brothers Inc. (TOL) : Free Stock Analysis Report
Zillow Group, Inc. (Z) : Free Stock Analysis Report
Opendoor Technologies Inc. (OPEN) : Free Stock Analysis Report
Redfin Corporation (RDFN) : Free Stock Analysis Report
Offerpad Solutions Inc. (OPAD) : Free Stock Analysis Report
