Not so long ago, in a galaxy not so far away, corporations thought they hit the jackpot. Not so long ago was 2021, and the galaxy in question was the United States of America.
Institutions discovered a niche market that produced reliable, incredibly high yields. The market was real estate — single-family homes to be exact. They got a small taste early in 2020, taking advantage of some of the consequences families faced in the early stages of the pandemic. Institutions entered the rental market, which was typically reserved for mom-and-pop shops. Then, in 2021, they spent a whopping $2.5 billion in single-family rental (SFR) acquisitions.
This year, the trend continued. Institutions were buying more single-family homes and building new complexes in strategic areas with the sole purpose of renting to families. They have been on pace to absolutely blow 2021 numbers out of the water. Earlier this year it was projected that Institutions are set to own 40% of single-family rental homes.
It seems, however, that this could be coming to a halt. Opendoor, an iBuying giant, is reportedly selling homes at a loss for the first time ever. According to an article by The Real Deal, a fast-changing market, rising interest rates and a volatile stock market combined to hurt home values at a time when Opendoor is on the hook for properties it picked up in a historically hot market.
The company reportedly took a loss on 42% of its home sales last month. This marked a first, as their buy-to-sell premium never dipped below 1% before this month. Through the toughest part of a pandemic, the company was able to stay afloat and maintain profit. Now? Not so much.
Could this just be part of a pendulum? Are losses bound to happen? Will the company right itself after a month or two? It’s not banking on it. The most alarming thing about the situation is that, according to an Opendoor spokesperson, “We have moved quickly and decisively to prioritize inventory health and risk management.”
What the spokesperson is telling you is that despite losing money on nearly half of their sales in August — and with no signs of the trend reversing — they are continuing to sell and sell a lot.
“The first hypothesis is they wanted to book as much revenue as possible in the third quarter,” analyst Mike DelPrete told The Real Deal. “The second would be they think things are going to get worse — better to lose a little money now than a lot of money later.”
An unnerving quote, to be sure. It’s reminiscent of a quote from noted Jim Cramer critic George Noble, who says an everything bubble is at hand. Noble, managing partner and chief investment officer of Noble Capital Advisors, shared his views in a tweet and June’s Belkin Report, which could be summarized as less than optimistic. Michael Belkin had an especially bearish outlook on energy, which has looked like a good call. Are any other experts calling for an everything bubble?
Chamath Palihapitiya believes so and has said on his recent podcasts, describing the situation as merely “at the beginning of the beginning.” His sentiments seem to echo that of famed investor Michael Burry who has warned about the “biggest market bubble in history” and has hinted that the “mother of all crashes” may be underway.
Where is the optimism? For starters, if institutions like Opendoor are selling at a loss, that, in theory, means somebody is getting a good deal. Additionally, if they are speculating that things may only get worse as heading into early 2023, they may inadvertently be sharing the best time for individuals to purchase homes.
Some large investors have taken a long-term approach to investing in single-family homes. In a recent interview with Benzinga, Ryan Frazier CEO of Arrived Homes said, “As much as people think they can time the market, it’s really hard to actually do. Historically, the consistent way to build wealth in real estate has been to buy and hold over longer periods.
“Over the long term real estate has tended to go up, so this buy-and-hold mentality has helped real estate investors weather potential downturns and come out stronger on the other side. For example, real estate investors who purchased before the great financial crisis and were able to hold through the years following 2008 saw home prices recover and then continue to appreciate steadily.”
Unlike corporate investors such as Opendoor, Arrived Homes is a platform that gives retail investors the opportunity to own income-producing rental properties through fractional ownership with an investment of $100 to $10,000.
Income-producing assets are considered by many to be a smart hedge against a market downturn. On Benzinga’s Real Estate Podcast with Kevin Vandenboss, Edward Pitoniak CEO of VICI Properties said, “With the market in so much chaos and so much uncertainty, what can you be certain of? Owning dividend-paying stocks in times of utter turmoil is, assuming the dividends stream is well secured, at least, you're going to get something.
“I don't think that has resonated as much with the retail community. I think, to the retail community, dividend-paying stock - that is boring. And I think at a time like this, one of the questions to ask. Maybe it wouldn't kill me to actually be a little bit bored right now because the alternative is hyperventilating.”
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