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Just a few years ago, iBuyers were the Davids of the real estate industry, and lower transaction costs and quick-fire closing times would be the stones they’d use to take down the traditional transaction model.
Although their market share was comparably minuscule at their peak, there was enough interest from frustrated consumers and venture capital backing from Wall Street to imagine a future where iBuyers became the Goliaths.
However, a mid-coronavirus pandemic market shift began knocking iBuyers off one by one, first with Zillow Offers in November 2021. The following year, RedfinNow and RealSure closed their doors as rising interest rates, waning consumer activity and other market factors made iBuying an increasingly unattractive model.
Meanwhile, Opendoor and Offerpad began facing intensified challenges with profitability and falling stocks.
Don Mullen | LinkedIn
While some are still optimistic about iBuying’s future as analysts forecast a market rebound beginning later this year, “Big Short” investor and Pretium CEO Don Mullen said the business model will soon be obsolete.
“IBuyers will probably disappear completely,” Mullen told Bloomberg on Tuesday. “I’d be surprised if they exist at all in 24 months. So much for that industry innovation.”
The basis of Mullen’s prediction comes from his experiences during the Great Recession when millions of homeowners were forced to quickly sell their homes in the face of foreclosure. Those homeowners, he said, created the repricing structure that saw home values and prices plummet for roughly four years before starting to recover.
“There was a great level of uncertainty about buying because people were concerned about unemployment, which was much higher,” he said.
Despite its challenges, Mullen said this downturn is much different than the Great Recession since most Americans — specifically homeowners — are in a much better place financially. The unemployment rate is holding steady and homesellers are sitting on historically-low mortgage rates, meaning homeowners aren’t in a rush to put their homes on the market.
“The reason prices won’t go down is that people aren’t listing their houses. And you wouldn’t expect them to, because the average mortgage outstanding is 3 percent,” he said of the historic drop in mortgage rates two years ago. “Nobody who owns a house with a 3 percent mortgage can afford to upscale like they used to, because it costs 400 basis points more to finance.”
Opendoor, the ‘forced seller’
With that in mind, Mullen said every financial cycle is ruled by “the forced seller.” In 2008, the forced seller was the average homeowner who lost their job and likely had a subprime mortgage. This time, he said the forced seller is iBuyers.
“In every financial cycle, it’s the forced seller that creates the repricing. In this marketplace, the forced seller is not the American homeowner, because there’s no trigger event,” he said. “It’s the iBuyers [which use technology to make quick offers on homes]. Opendoor [Technologies] is a forced seller of houses.”
Since homeowners aren’t moving, Mullen said iBuyers will become more dependent on homebuilders to keep their businesses afloat.
“Homebuilders, I think, will all be around. So if I looked at a map or a sourcing tool and said, ‘Where are you going to buy houses?’— if you’re buying them from homeowners, they’re going to go down 3 to 5 percent,” he said. “Where are you going to buy them from homebuilders? At 20 percent to 30 percent discounts from the peak.”
“They made a lot of positive carry on their inventory because as they built those houses, prices kept going up, so they’re still making net dollar positive, but not a lot,” he added. “The iBuyers are going to be losing 25¢ to 30¢ on the dollar at a minimum and losing money on every house.”
This shift in market dynamics could result in a single-digit decline in home prices, he said, which aligns with current forecasts of a 4 to 7 percent decline by the end of 2023.
Mullen was global head of credit at Bear Stearns before joining Goldman Sachs in 2001. He was a partner at Goldman until 2012.
Goldman Sachs has also recently been a critic of Opendoor, with analysts advising investors in October to sell their stock in the company.
“In our view, declining home prices will lead iBuyers to increase service fees directly or indirectly to manage margins, resulting in reduced purchase volume,” the Goldman analysts wrote at the time. “Combined with longer holding periods, this lower level of home sales velocity along with pressure on unit economics from rising interest rates and the slowdown in home price growth will pressure earnings power.”
Despite that outlook from four months ago, Goldman Sachs unveiled on Wednesday that it owned or managed 45.8 million shares of Opendoor or 7 percent of the company’s shares. That’s up from 7.5 million shares at the end of September.
Goldman Sachs didn’t immediately respond to a request for comment.
Goldman could be managing ownership on behalf of its clients and hasn’t necessarily changed its own outlook.
Mullen declined through a public relations team to talk with Inman about his prediction or comments to Bloomberg.
Opendoor is trying to move on from a collection of houses it bought in the run-up to the peak of the market during the first half of 2022. It still owns a number of those homes, many of which have fallen in value.
The company says its recent acquisitions are healthier than what it bought early last year, although it is buying far fewer homes than it was at that time.
Opendoor has shifted its focus to a new third-party platform that can act as a kind of intermediary between buyers and sellers through what it calls its Marketplace.
“Right now we’re sort of at the crucial juncture for a test on this business model to see if it’s actually viable over the long run,” said Jason Weaver, managing director and senior research analyst for Compass Point.
Weaver said he’s generally bullish on the concept of iBuying, but he isn’t recommending investors buy Opendoor at the moment. (He is, however, recommending they buy Offerpad, the smaller yet still prolific iBuying competitor to Opendoor.)
Betting on single-family rentals
Although iBuyers apparently won’t make it to the other side of this market shift, Mullen unsurprisingly remains bullish about the single-family rental industry — which is at the core of his company, Pretium.
“Residential real estate is a much more attractive investment opportunity than it was then,” he told Bloomberg. “In the single-family rental business, in particular right now, people — ourselves and Invitation Homes, American Homes 4 Rent, Tricon [Residential] and others — have proven the ability to scale the purchase of the assets and operate them at attractive margins.”
Mullen waved off criticisms about institutional buyers, saying companies like his own less than 5 percent of the country’s rental stock.
“We still own less than 5 percent of the rental houses in the country, so how can we be buying up everything?” he said. “We’re still a small factor in the rental business — not houses overall. And of the people still buying houses, there’s only, like, the three of us.”
He said single-family rentals have the best long-term fundamental value, especially considering the fact that millennials are leaning more toward a life of renting, either by force or choice.
“There isn’t good enough data that says what percentage of millennials — we know it’s more than other generations, we just don’t know how much more — want to rent on purpose,” he said. “They have the ability to buy a home, but they choose not to. We know there’s a large component of that generation burdened by student loan debt. Interest rates are making this less affordable for many people. So as a result, we would expect to see a net increase in rentership.”
Mullen declined to share Pretium’s returns but said they’re in a solid place to successfully navigate the current market.
“You need to be in a position where you bought an asset that you believe has long-term fundamental value,” he said. “That’s why we didn’t focus on office [buildings], for example—we think office has higher volatility. And then the second is how much leverage you put on something, right? It’s easy to get in trouble with 90 percent leverage on houses. It’s much harder to get in trouble at 70 percent, or 60 percent or 50 percent.”
Opendoor is set to share its fourth-quarter earnings on Feb. 23.
It reported losing nearly $1 billion in the third quarter but has said the final three months of 2022 could be its “trough.”
