In retrospect, it's clear that Opendoor Technologies' (OPEN +0.23%) earliest public investors got ahead of themselves shortly after its 2020 initial public offering (IPO). Shares of the real estate outfit soared because of the pandemic with too few investors worrying about the stock's actual value or the company's growth prospects. As reality set in, so did the profit-taking, and the stock is still down 90% from its early 2021 peak.
But the pendulum swings both ways. The steep sell-off was just as exaggerated as the red-hot rally that came before it. This stock is now primed for a bout of bullishness, assisted by a real estate market that's not as terrible as it was once feared it would be.
What's Opendoor Technologies?
Opendoor is a residential real estate buying and selling platform. The company will pay cash for houses and then sell these properties to other buyers.
Sellers might get less than Opendoor's asking prices after paying commissions, but they don't seem to care. Many people just want to sell as quickly as possible with as little hassle as possible, and the company makes that happen.
It's been around since 2016, although it was off the radar until 2020. That's when several bullish tailwinds converged, including ultra-low interest rates, an abundance of stimulus money, and lots of free time for consumers to not only shop for a new home but also dive into the stock market.
While shares of Opendoor drifted sideways for several weeks following its IPO, the market "found" it (and then fell in love with its premise) in Sept. 2020.
The surge wasn't built to last. Not only was the stock overvalued then, but the real estate market also was running straight into a headwind. Although sales of existing homes in the U.S. grew from 5.64 million in 2020 to 6.12 million in 2021, according to the National Association of Realtors, last year's count of 5.03 million was a multiyear low.
This year's projected figures are even lower. Last year was a tough one for the company as it bought properties that proved tough to sell at any reasonable price.
NASDAQ: OPEN
Key Data Points
This stock's big pullback from its 2021 high, however, might already reflect all of this past and present weakness (and then some) without reflecting any of the likely real estate recovery in store beginning in 2024.
It's complicated
The residential real estate market is apt to start -- or continue -- firming up, but in some ways, it could worsen.
Take pricing, for instance. Although home prices have remained strangely resilient of late, that mostly has to do with the limited amount of inventory available for sale. The National Association of Realtors reports only 1.11 million homes were listed for sale within the United States as of July. While that's up slightly from last year's multiyear low of about 900 million, it's also a far cry from the pre-pandemic peak of just under 2 million, and well below 2007's high of over 4 million.
So this is still a seller's market, particularly given the lingering housing shortage. As more inventory comes to the market, however, that will put pressure on home prices.
Image source: Getty Images.
And that inventory is coming sooner rather than later. Norada Real Estate Investments says, "As more homes are built and come onto the market, we can expect to see some relief from the supply shortage." An outlook from Freddie Mac posted in July said, "Our official corporate forecast for the next 12 months has house prices falling by 2.9% and an additional 1.3% over the subsequent twelve months." Moody's Analytics believes home values will fall between 5% and 10% by early 2025.
This price contraction isn't entirely bad news, though, particularly for Opendoor Technologies. Lower home prices will spur demand by offsetting the additional cost of home-buying stemming from higher interest rates.
With more buyers ready to go with cash in hand, Opendoor might be able to attract more would-be home sellers. It's also worth pointing out that unusually low inventory levels are abating.
Although still near record lows, numbers from Realtor.com indicate that listings have been steadily rising since April's lull with new listings logging an unusual August jump to 387,076 from July's count of 374,028. New listings normally peak in May and dwindle for the remainder of the year.
While not a complete reversal of fortune, it's a hint that the nation's residential real estate market is at least starting to find a more tenable balance that the National Association of Realtors' chief economist, Lawrence Yun, believes will take five years to fully achieve.
That's the kind of trend true long-term investors interested in Opendoor Technologies should be looking for anyway.
Still a risk but a well-calculated one
It's still not right for everyone's portfolio. Opendoor offers above-average upside potential, but it also brings above-average risk to the table. Although it's not tightly tethered to home prices, its success does depend on plenty of real estate transactions being completed.
The real estate market will bounce back. Interest rates could even fall. But it's difficult to know when or to what extent this will happen. If you can stomach that uncertainty for a while, Opendoor Technologies is an interesting prospect here.
