Tuesday, August 2, 2022

New Home Sales See a Return to 'Normal'... And a Comment on Opendoor

By Herb Greenberg (View Archive)

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GM's next big release has no engine and no wheels

In a shocking move, auto giant General Motors is venturing into a whole new space (hint: NOT electric vehicles). While industry analysts see this as a way of catching up with Tesla, the bigger reason could be because this new space is getting the full backing of the current administration and could mean huge tax credits in the future. Or it could just be that this fledgling industry has more scope than the declining auto industry. Whatever it may be, this move could put GM into the same bracket as Apple, Google, Microsoft, and Amazon. Get the details of this massive trend here.

During the boom, you would be lucky to get yourself on a wait list for a new home, even starting in the millions – let alone get one – here in Southern California...

They couldn't build them fast enough. But as the longtime sales manager for one SoCal developer told me the other day, using towns far east of Los Angeles as an example...

When you have homes in Palmdale or even Menifee that are going for $600,000, one has to scratch their head and say, "OK, well, those are markets where you could typically buy a home for $300,000 or low $400,000." Something had to give. There was no way to sustain at the pace we were moving.

In her view, based on a few decades in the business, things have returned to "normal." Or as she puts it...

It feels like a reset. I think that I'm feeling like we're picking up where we left off in 2018.

The interview, which I did for the expert network Stream, had some other interesting nuggets...

Among them...

  • As sales have slowed, the sales manager knows of at least one builder that cut prices on $1 million dollar homes by $150,000 – and this was a few months after the project opened. She said that "it hasn't moved the needle," and out of 91 units, only nine have sold.
  • Other builders have held back on price reductions... so far.
  • A recent soft opening by Toll Brothers (TOL) near Valencia had less than 100 visitors and only one sale. The grand opening a week later drew even fewer visitors and just one sale as well... which is a terrible conversion rate.
  • Buyers who fell out of escrow as prices soared are now getting a second crack at the same home.
  • Canceled orders are on par with the 14% figure that NVR (NVR) reported last week.
  • As prices have fallen, the sales manager is seeing a return of investor-buyers, possibly with an intention to buy and then rent.

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Major investors are taking note - and the legend who bought Amazon at $2.41 and Apple at $0.35 is pounding the table on one $4 stock.

One other interesting tidbit, and this one involves online real estate broker Opendoor (OPEN)...

About a year ago, when the market was sizzling, Lennar (LEN) stopped cooperating with brokers. There are rumblings now that it has struck a deal with Opendoor, which buys houses directly from sellers.

That would make sense since Lennar is an investor in Opendoor and Lennar's co-CEO sits on Opendoor's board.

No surprise then that the two have been doing this in select markets for a few years. But there has been little fanfare, and neither have mentioned the program in their filings or have discussed it on earnings calls.

Still, Lennar at one point likened it to a "trade in" program. Or as it says on its website...

You can trade in your car and phone for a new one, so isn't it about time you can do the same with your home? With Lennar's New Home Trade-in Program, you can do just that.

It makes sense, because this can instantaneously eliminate one of the biggest hurdles for many prospective buyers... having to first sell their own homes. During the boom, builders didn't need to accept contingent sales – and this kind of program certainly helped.

In a bust or merely a slowdown, if there is one, a contingent buyer is worth the risk.

There's just one catch, especially if something is too good to be true...

Opendoor has only been in business since 2014 – a booming time for home sales and home prices.

The company warns in its filings that its purchases of homes "are based in large part on our estimates of projected demand. If actual sales are materially less than our forecasts, we would experience an oversupply of inventory."

As it goes on to say...

An oversupply of home inventory will generally cause downward pressure on our sales prices and margins and increase our average days to sale. Our inventory of homes purchased has typically represented a significant portion of total assets.

Having such a large portion of our total assets in the form of non-income-producing home inventory for an extended period of time subjects us to significant holding costs, including financing expenses, maintenance and upkeep, insurance, property taxes, homeowners' association fees, and other expenses that accompany the ownership of residential real property and increased risk of depreciation of value.

In other words, it wouldn't be good for Opendoor.

Put another way, the company's model hasn't been stress tested yet. But as you can see in the chart below, its stock certainly has...

And based merely on fears of what might happen – with OPEN shares trading at less than a quarter of their old highs – the stock looks like it has failed that test.

As always, feel free to reach out via e-mail by clicking here. I look forward to hearing from you.


Herb Greenberg
August 2, 2022

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Herb Greenberg

Herb Greenberg is a senior editor at Empire Financial Research. Previously, he was the co-founder of Pacific Square Research and Greenberg Meritz Research & Analytics – both independent, short-biased investment research firms. Greenberg spent more than 40 years as a financial journalist at some of the country's leading newspapers, websites, and broadcast media, where he covered almost every industry. He served as senior stocks commentator at CNBC and was financial correspondent at the Chicago Tribune. He also spent 10 years as the daily business columnist for the San Francisco Chronicle, during which time he started his five-year run as Fortune's monthly Against the Grain columnist and was the morning business reporter for San Francisco's KRON-TV. When the Internet and online media were still emerging, Greenberg was one of the first mainstream journalists to make the shift online, when he became senior columnist at TheStreet. He later shifted to the same role at MarketWatch. When Dow Jones bought out MarketWatch, he added a weekend investor column for the Wall Street Journal to the mix. Earlier in his career, Greenberg was a reporter at Crain's Chicago Business and a business reporter for the St. Paul Pioneer Press. He also spent a year as an analyst at a risk arbitrage firm. Greenberg holds a bachelor's degree in journalism from the University of Miami and completed the Herbert J. Davenport Fellowship at the University of Missouri.

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