What happened
Shares of OpenDoor (OPEN +6.04%) rose 27.1% last month, according to S&P Global Market Intelligence. Investors responded to important pieces of economic data that fueled optimism around the housing sector.
So what
OpenDoor share prices are highly sensitive to interest rate expectations and economic indicators, as are many stocks in the real estate and homebuilding industries. The company acts as a middleman in the housing market, purchasing homes below market value and selling them quickly thereafter. It holds houses as inventory on its balance sheet, so its financial results can deteriorate quickly when the housing market sours. High mortgage rates and economic uncertainty drove housing demand lower over the past two years, challenging OpenDoor's sales volume and forcing the company to sell many residences at a loss.
Image source: Getty Images.
Investors have been pleased with OpenDoor's response to difficult economic conditions, as the company removed significant overhead expenses to reduce its cash burn rate. That optimism extended into July after inflation data came in below analyst expectations. Cooling inflation suggests that the Federal Reserve's interest rate hikes are slowly but surely working, so the central bank won't have to continue increasing interest rates indefinitely. Mortgages reflect prevailing interest rates, and rate hikes have crushed OpenDoor's share price.
Additional economic indicators corroborated the earnings report later in the month. The latest housing market data suggests that home prices continue to rise, though sales volume and new housing starts dipped lower in June. Employment data was overall positive, but weaker than expected, suggesting that the economy is slowing. That wouldn't normally be bullish for housing, but it means that the Fed is inching closer toward its goals and is less likely to keep pushing rates higher.
US Existing Home Median Sales Price data by YCharts
Now what
The Fed ultimately hiked rates in July and indicated that it would likely do so again in the future, but the monetary authority also indicated that it would react to data moving forward. Investors will have to wait and see exactly how this plays out, but it's more likely that policy is approaching its tightest point. That doesn't mean that rates will be cut any time soon, but the period of indefinite hikes seems to have ended, which should be more favorable for housing demand.
Housing data has been volatile month to month, and there's no reason to expect that to go away anytime soon. Even if the Fed achieves an elusive "soft landing," in which inflation cools without causing a major recession, consumers are still in an uncertain position. It's premature to definitively claim that the housing sector has reached a cyclical bottom, but the long-term growth potential does appear more significant than the short-term risks. OpenDoor stock will still be subject to heavy volatility based on economic data, but long-term bulls should be intrigued by this valuation if they're comfortable with the short-term risks.
