Amid the recession fears of today, everyone’s worried about the housing market and housing stocks. But I take to the charts to show that there’s nothing to worry about… yet.
In 60 years, there have only been four instances of sustained home price contraction. The housing market moves at a snail’s pace. And because of that, it takes a long time for strong home price appreciation to fall to negative growth.
The housing market is not like the stock market. That’s why you don’t usually see strong home prices plunge into the red over a matter of months. From that perspective, I believe the concerns of a housing market crash are a bit overstated.
Demand is a proven, durable driver, even during recessions. It’s still strong today. And given that the current housing supply is so low, prices really can’t depreciate. Home builders are losing confidence and are holding firm in their prices. And so are home sellers. We may see a brief decline in the market for a few months, but then it’ll be business as usual once again.
Now, what does that mean for Opendoor (OPEN)? Well, it sells homes over a 90-day period and gains a 5% commission per home sale. Home depreciation is usually around 1% per month. So, after three months, it may lose 3%, but it will still sell on a 2% gross margin. Indeed, it’s still a positive gross margin business even if the pricing algorithms were terrible (and they’re not). I think that more likely, it should be able to reel in between 4% and 8% margins. And that’s not priced into the stock at all.
Bottom line: I’m very confident in the Opendoor model.
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On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.