Nestled in the sprawling desert community of North Las Vegas, the three-bedroom home at 6043 Clovelly St. perfectly embodies what has gone terribly wrong at Opendoor Technologies. Back in April 2022, Opendoor bought the home for $420,900. The company then flipped it back onto the market in May 2022 for $480,000, only it was too late: Las Vegas had already shifted from a housing boom into a sharp housing correction. By the time the home sold in January 2023, Opendoor fetched only $346,000—or 17.8% less than the purchase price.
“They [Opendoor] are taking huge losses, and as buying agents, we are all testing their pain threshold. When I represent a buyer, it’s my fiduciary duty to represent them the best I can,” Chris Davis, a real estate agent in Phoenix, tells Fortune. “So when I look at an Opendoor house for a client, as a buyer’s agent, we are coming in low and hard. We are getting counter offers and we are having conversations. If they weren’t desperate, we wouldn’t be having conversations or getting counter offers, but they want these things off their books.”
We’ve seen this movie before. Back in 2008, leveraged amateur home flippers across the country had no choice but to sell—or foreclose—at big losses as home prices began to slide. Only this time around, the correction is regional, and it’s a corporate titan that got stuck holding the bag.
Not too long ago, Opendoor had been riding high. The San Francisco–based company entered the market with the goal of becoming a leader for so-called iBuying. It works like this: Through its online platform, Opendoor makes speedy offers to buyers—who are often selling homes in need of some tender loving care—in exchange for a “service fee.” The company then makes the needed repairs and flips the home back onto the market for a quick buck.
Opendoor’s early success was enough for investors to push the company’s stock price to over $34 per share in 2021 not long after its initial public offering. The company’s robust growth also saw it go from a startup in 2014 to No. 425 on the Fortune 500 in 2022. Even Zillow, which had launched its own iBuyer business in 2018, was racing to catch up with fast-growing Opendoor.
But fast-forward to this week, and things aren’t looking so hot for the former Wall Street darling. On Tuesday the company announced it would lay off another 560 staffers, or 22% of its remaining workforce. And on Wednesday, shares of Opendoor closed at just $1.56.
How did things go so terribly wrong for Opendoor?
To better understand, let's rewind back to the fall of 2021. At the time, the U.S. housing market was still going gangbusters from coast to coast. However, in hindsight, the first crack appeared when Opendoor's competitor Zillow announced in October 2021 that it would pause its own flipping business. Just weeks later, Zillow announced it was shutting down the effort—known as Zillow Offers—and laying off 2,000 workers while scrambling to off-load its remaining homes.
It turns out that Zillow had made a bad bet. Zillow's much-lauded algorithm was struggling to predict future price appreciation, which led to overpaying for homes. Zillow executives were also unsure as to whether the iBuyer flipping business model would turn into a long-term profit engine.
Jeremy Wacksman, Zillow’s COO, told Fortune in May 2022 that the company had no choice but to go big on its iBuyer program: Flipping homes is an expensive, complicated, low-margin business that can be profitable only on a massive scale. Zillow needed to “automate transactions so efficiently that you can cover the fixed cost required to run that operation, which requires a lot of technology, a lot of data, a lot of automation, and, again, a lot of capital,” says Wacksman.
In the end, that scale—which saw home flipping account for 87% of Zillow's revenue in the first quarter of 2022—and the potential for even bigger losses was enough for Zillow executives to exit the business.
“It’s a part of business. You’re going to take some big swings. Some work out, some don’t,” Zillow president Susan Daimler told Fortune last year.
As Zillow exited its home flipping program, Opendoor investors didn't seem too worried: On Nov. 2, 2021, the same day Zillow announced it would permanently exit iBuying, shares of Opendoor closed at $21.12. In hindsight, maybe Opendoor investors should have been on higher alert.
Speaking in front of Congress later in November 2021, Fed Chair Jerome Powell said "it’s probably a good time to retire" the phrase "transitory." Powell, it seemed, was sending a hawkish message that inflation was here to stay and the Fed would jack up interest rates. If the Fed actually did so, it would mean the 3% mortgage rates that were helping to power the Pandemic Housing Boom would go poof.
Nevertheless, iBuyers like Opendoor and RedfinNow kept buying up homes in late 2021, and homebuyers kept bidding up home prices. The music kept playing, but it was about to stop.
The U.S. housing market was an absolute frenzy through the first few months of 2022. In fact, U.S. home prices as measured by the Case-Shiller National Home Price Index in March 2022 notched a record year-over-year jump of 20.8%.
But the national housing boom's end had already been set into motion. In preparation for the Fed's first 25 basis point interest rate hike in March 2022, financial markets were already pushing up mortgage rates. The average 30-year fixed mortgage rate, which ended 2021 at 3.11%, was up to 3.89% by the end of February 2022. By the end of March 2022 it was up to 4.67%.
Mortgages rates kept inching up through the first half of 2022, and Opendoor kept buying homes. At first those spiked rates simply slowed down the housing market. However, right around June 2022, when mortgage rates topped 6%, Western housing markets like Phoenix and Boise slipped into home price corrections. Soon afterward, the national housing market slipped into its first correction since the housing crash bottomed out in 2012.
Nationally speaking, the home price correction—which saw U.S. home prices fall 3% on a seasonally adjusted basis between June 2022 and January 2023—has been somewhat mild. However, the housing correction has been particularly sharp in frothy housing markets out West, with many seeing close to double-digit home price declines in the second half of 2022. Those hard-hit Western markets, including places like Phoenix (down 7.5% from its peak) and Reno (down 7.8% from its peak), are also the very places where iBuyers like Redfin and Opendoor (see chart above) had significant exposure.
In those fast-correcting Western housing markets, iBuyers like Opendoor and Redfin had no choice but to start slashing home prices last summer.
“When the shiitake mushrooms hit the fan, you [investors] want to get out first. The way to do that is to figure out where the lowest sale is, and be 2% below that. And if it doesn’t sell in the first weekend, move it down [again],” Redfin CEO Glenn Kelman told Fortune last fall. "We notice immediately when fewer people are on our website and fewer are signing up for tours…We’re sitting on $350 million worth of homes for sale that we bought with our own money, or—worse—bought with borrowed money. And what we always told investors is that we would protect our balance sheet by acting quickly. We don’t have hope as a strategy. We immediately started marking down things.”
In November, Redfin joined Zillow in throwing in the towel on its home flipping business. The move saw it cut 13% of its staff.
Not too long after Redfin announced its iBuyer exit, Opendoor had its own shake-up. In December, Opendoor cofounder Eric Wu announced he would step down as CEO. He was replaced by Carrie Wheeler, the company's chief financial officer.
A quick look at Opendoor's financials shows what Wheeler is up against. While Opendoor's revenues grew 94% to $15.6 billion in 2022, so did its losses, going from $662 million in 2021 to a $1.4 billion loss in 2022. Even more glaring, its adjusted net loss climbed 394% from a $116 million loss in 2021 to a $574 million loss in 2022.
In total, Opendoor sold 39,183 homes in 2022, up from 21,725 homes in 2021 and 9,913 homes in 2020. Of course, ramping up just as the national housing market was peaking proved costly.
"Fed action to raise target rates by 300 bps [basis points] in less than five months [in 2022] catalyzed the fastest shift in housing conditions in four decades. We constantly track macroeconomic and housing conditions and adjust our strategies accordingly, but we did not predict the speed of decline in home price appreciation and transaction volumes," wrote Opendoor in its shareholder letter published in February. "On the resale side, we reduced list prices [in 2022] to stay in line with the market. In hindsight, we did not do this quickly or aggressively enough."
The good news for Opendoor? According to a report published by Goldman Sachs in February, Opendoor has sold 66% of its second-quarter 2022 cohort—otherwise known as the homes Opendoor bought at the peak of the market last year. By the end of the first quarter, Opendoor expects 85% of that Q2 2022 home cohort to be gone.
The bad news for Opendoor? In that same report, Goldman Sachs reiterated its sell rating on Opendoor (ticker: OPEN) and reduced its 12-month share price target to just $1.
Jay McCanless, a senior vice president of equity research at Wedbush, is a bit less bearish on Opendoor. He thinks the U.S. housing market is now "through the worst of it" and the sharp house price declines are over. The lack of inventory and strong demographics, McCanless tells Fortune, puts a floor on how far home prices can fall. Already, home price indexes produced by firms like CoreLogic, Zillow, and Black Knight are showing that national house prices are rising again on a month-over-month basis. Even some markets out West, where the housing correction was the most intense last fall, are starting to show fewer price cuts.
The improved housing market in 2023, coupled with Opendoor's "strong cash position," is why McCanless has a $3 share price target on Opendoor. That said, that figure pales in comparison to the $34 share price Opendoor had back at its peak in 2021.
Opendoor declined Fortune’s interview request. However, an Opendoor spokesperson did send Fortune the following statement: "In the wake of the once-in-a-40-year transition in the housing market last year, we've begun to see early signals of market normalization. For Opendoor, we kept our promise to customers in contract with us through last year's volatility and are making good progress on reselling those homes while also acquiring new homes at attractive margins for the business. When the market may not be reliable for sellers, Opendoor will be their certain offer."
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