And right now, Opendoor’s behavior, fueled by the data it sees, fuels the bad forecasts ahead. “Right now, they’re trying to sell as much inventory as quickly as possible,” says DelPrete. One possible story is that based on data seen by Opendoor, the company believes things could be even worse. “They were reading tea leaves,” he said. “They just have better tea leaves than you and me.” Fraser doesn’t object to that: “We can react to changing conditions very efficiently and very quickly thanks to the signals we have in our business,” he said.
But the data Opendoor has access to may only tell half the story. iBuyers accounted for 1.3 percent total U.S. home sales in 2021, an all-time high, but some regions are more popular than others. “Their model is such that they can only really succeed in certain areas of the market,” said Amit Seru, a professor of finance at the Stanford Graduate School of Business. iBuyers operates in areas with housing supply relatively new and homogeneousso they are over-represented in cities like Phoenix and Las Vegas but ignore states like Missouri and parts of Texaswhere older houses predominate.
Fraser counters the idea that Opendoor has no insight into the broader market. Its “buy-box coverage,” where it offers homes in the markets it operates in, is 65%. “This is a mainstream product, not a niche product,” he said.
While prices in Phoenix increased during the pandemic from $445,000 in August 2021 to $549,300 in August 2022amount of time the asset spends on the market before selling 30 percent increase over the same period, suggesting that buyers are thinking more about their purchases — a problem for iBuyers, who rely on quick sales.
Analyst forecast on the market in September, and that became a reality, when Opendoor sold at a loss a large number of properties. Seru really thinks that the struggle iBuyers is facing right now is a manifestation of some economic hardship, because of the way iBuyers operates. When the time is right, they win big. And when times get tough, they’re among the first to struggle.
According to Tomasz Piskorski of Columbia Business School, who is also a member of the National Bureau of Economic Research, iBuyer’s gross profit on any given trade is in the 5% range. When those margins squeezed, iBuyers was among the first to give up because their business model was based on selling quickly the homes they bought at a profit. “Opendoor knows now that if they buy this home – and remember it will be discounted – they will probably be stuck with it for months,” says Piskorski.
DelPrete compares iBuyers buyers like Opendoor and short-term stock traders. For decades, people bought shares of a company with the goal of holding the stock for many years and earning a steady return on their investment. People do the same with property: move into a house, live in it for decades, then sell in exchange to increase or decrease in size as needed, raking in often substantial profits as they go. iBuyers has sped up that process, moving houses in months, rather than years, and creating tighter profit margins. It’s a fragile business model and doesn’t work well when prices are volatile, says Piskorski.
