Real estate stocks have gotten crushed over the last couple of years as soaring mortgage rates have squeezed demand. At the same time, homeowners who capitalized on rock-bottom mortgage rates during the earlier days of the pandemic are reluctant to sell and give up their low mortgage rates.
As a result, existing home sales slipped to their lowest level last year, falling 19% to 4.09 million. That's even lower than they were during the trough in the housing market crash during the global financial crisis of 2007-2009.
However, current market circumstances should favor real estate stocks like digital platform Opendoor Technologies (OPEN 3.38%).
Here are four reasons why.
Image source: Getty Images.
1. Conditions can't get much worse
That existing home sales were the slowest they've been in 28 years shows how dry the housing market has become. On a per-capita basis, 2023 was the slowest year for the housing market in more than 30 years.
However, those conditions will almost certainly improve over the next few years. Americans will eventually need to sell their homes and buy new ones as the primary reasons that people buy and sell homes aren't economic. People die. They get married and divorced. They have children, and they retire and downsize. Those will continue to occur regardless of mortgage rates.
Over time, existing home sales should return to the historical mean, which will benefit operators like Opendoor, which are dependent on housing market transactions for their business.
2. Mortgage rates are likely to fall
High mortgage rates are the primary reason for the slowdown in the housing market, with the 30-year fixed-rate mortgage hitting nearly 8%. However, the Federal Reserve is forecasting three interest rate cuts this year, or 75 basis points worth of rate cuts, which will help bring mortgage rates down.
In fact, Fannie Mae predicts that mortgage rates will fall below 6% this year, which will help drive a housing market rebound.
Rising mortgage rates hammered Opendoor in 2022 as the company was stuck with overpriced inventory as home prices fell and demand dried up. Falling mortgage rates, on the other hand, should have the opposite effect. They should help push home prices higher by lowering monthly payments and bringing in more buyers.
Since Opendoor's business is essentially home-flipping, the business should rapidly turn profitable if home prices start to rise again.
3. The business is more streamlined
Opendoor stock has plunged since it went public through a SPAC merger at the end of 2020, and the stock is now down 90% from its peak.
However, management has responded to the housing market slowdown by cutting costs and driving efficiencies in the business. The company cut roughly 40% of its jobs in two rounds of layoffs, and it's significantly reduced its inventory, setting it up for a recovery in the housing market.
The company is also getting access to more home sales transactions, saying more than 30% of U.S. transactions fell into its buybox, and it's improved its customer acquisition channels.
Those improvements make the company well positioned to capitalize on the coming turnaround in the housing market.
4. The stock is already building momentum
Opendoor stock has been highly volatile, but it's already responding to signs of lower interest rates. In fact, the stock more than doubled from its nadir at the end of October to its peak just before the end of the year.
The real estate stock has pulled back in 2024 as investors have tamped down their estimates for the timing of the first rate cut, but Opendoor looks like a good bet to move higher over the coming years as rates fall, and the company's cost cuts pay off.
