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By Bob Hillery
CR Properties 

Review of all things Real Estate: The third quarter earnings season just wrapped up, and yikkers, the reports are brutal!

 

Last updated 12/1/2022 at 5:48am



Over the past few weeks, publicly traded real estate companies revealed how much money they made or lost between July and September, which was one of the most tumultuous times in recent housing history.

Though mortgage rates have been rising for much of the year, they shot up past 6% during the third quarter, which at the time was a stunning development and far above what most experts had predicted at the beginning of 2022 when interest rates languished in the 3% neighborhood.

Predictably, the rising rates also led to falling homebuyer activity. The result was that the third quarter made it abundantly clear that the housing market downturn would likely be more severe and last longer than many forecasts predicted.

The expectation was that most real estate companies’ earnings reports would be disappointing. But even with low expectations factored in, this quarter nevertheless delivered some shocking numbers. There were massive losses, a lot of dour predictions about the near future and the realization that there would be many requirements to cut costs.

There were a few positive surprises as well, and not every company is feeling the pain to the same extent. But overall, this earnings season was the first detailed glimpse into the financial costs of the downturn, and the takeaway was that the housing industry is facing some serious challenges.

Here are the biggest threads to come out of this season:

iBuyers are facing an existential moment

Probably the single most significant number that came out of this earnings season was $928 million. That number, just shy of $1 billion (with a “B”), is the amount that Opendoor lost in the third quarter alone. The company was quick to point out that the losses weren’t purely in cash, but rather were due to adjusting the valuation of the homes the company had in its inventory.

Still, it’s a startlingly large loss which sent Opendoor shares plummeting to a new all-time low of $1.46. Rival Offerpad reported earnings a day earlier, and revealed that it lost $80 million; a much smaller number but also one that reversed several months of profitability for the second-largest dedicated iBuyer. That news also sent Offerpad’s shares tumbling.

These numbers highlight two issues for the iBuyers. The longer-term issue is whether or not the iBuying model works in a market where home prices are static or falling.

Significantly, Redfin, the third of the remaining big three iBuyers announced this earnings season that it is shutting down its iBuying operations. CEO Glenn Kelman described iBuying as requiring “a staggering amount of money and risk for a now-uncertain benefit.” Similarly, Zillow’s Rich Barton said in his company’s earnings report that he’s glad to have abandoned iBuying last year.

The second issue is more immediate: If the iBuyer’s can’t turn around their stock performance, they face the risk of getting kicked out of the stock market. That’s because if a company spends more than a month with shares trading below $1, it can be delisted; something that would make it far harder to trade and attract investors, and which would be a devastating symbolic blow.

Offerpad shares last rose above $1 earlier this month. Opendoor’s shares haven’t fallen below the $1 mark yet, but they’ve been heading in that direction and came dangerously close after this latest earnings report. Both companies’ share prices were up somewhat last Friday, but if iBuyers can’t entice Wall Street traders in a major way, they could be facing bigger problems sooner rather than later.

This downturn may last a while

While the downturn was a ubiquitous topic in this season’s earnings report, a number of executives also went on the record with predictions of how long the hard times might last.

Anywhere CEO Ryan Schneider, described “a challenging macro housing outlook for the rest of 2022 and 2023.” Compass CEO Robert Reffkin made a similar prediction, saying the housing market will “remain challenged during 2023 before returning to stability and growth in the future.”

Zillow CEO Rich Barton described both near and medium term “headwinds.”

CR Properties Real Estate Services Broker/owner (that would be me) thinks that the market will be challenging for sellers but with market awareness, proper pricing and awareness of the value of concessions to buyers, the market will still be “winnable” for both sellers and buyers; particularly if the interest rates continue their recent downward trending. All parties will need to be cooperative, respectful, and negotiable but there can be win-win real estate transactions in our future.

 

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