In this year of the special purpose acquisition company, it can be daunting to figure out which one of the reverse mergers have the potential to be a top player in its industry. But in many respects, Social Capital Hedosophia Holdings II (NYSE:IPOB) stands out for its superior relevancy. Pending a shareholder vote on Dec. 17, the company will become Opendoor Technologies, and IPOB stock, the disruptive platform that could revolutionize real estate.
Well before the novel coronavirus pandemic, real estate symbolized the American Dream, the pathway to wealth creation and financial independence. But it was also a hassle to get there, turning into a nightmare for many buyers. Obviously, you have the paperwork that feels like you’re writing a dissertation on Leo Tolstoy’s classic War and Peace. And prior to this, you have the research that goes into every potential target.
But it’s arguably worse for the seller, even in a seller’s market. That’s because you have to list your home and do all the preparatory work to compete with others and receive top dollar. Plus, if you’re selling your primary home and moving to another residence, the scheduling aspect is stressful. Get it wrong and you could be paying a “double” mortgage.
Fortunately, Opendoor eases the process by allowing sellers to sell directly to the company. This way, you don’t have to deal with all the headaches, such as marketing and presenting your abode for home house sessions. Further, any repairs will be handled by Opendoor. Better yet, you can schedule your closing date so that you move when you’re ready. It’s this convenient accessibility that is driving interest in IPOB stock.
But with the pandemic, Opendoor becomes even more mission critical. By selling directly to the firm (clients can also list through the company’s network if they wish), Opendoor eliminates risks associated with contact with strangers. But are these conveniences enough to drive up IPOB stock to higher plateaus?
Broader Housing Concerns Weigh on IPOB Stock
At first glance, the enthusiasm in the housing sector seems the perfect catalyst for IPOB stock to continue rising higher. Sure, the demand for what usually is a family’s most expensive purchase during a once-in-a-century pandemic seems completely counterintuitive. But work in some fundamental factors and you gain a greater appreciation for its possible sustainability.
First, interest rates are ridiculously low. For those with any level of financial sophistication, lower rates disincentivize savings and instead rewards consumption in hard assets. And at a certain point in terms of mortgage payments, it’s advantageous to have lower interest rates and a higher home price than vice versa. Therefore, you have a FOMO (fear of missing out) effect going on, egging prices even higher.
Second, not everyone during this pandemic is in crisis mode. Indeed, with millions able to work from home, they’re able to saving on commuting costs, allowing home buyers to bring more money to the table. Of course, this dynamic encourages owners to punch out while the going is good, boosting IPOB stock.
Click to Enlarge
But what many mainstream media reports are missing is that mortgage delinquency rates are starting to look earlier similar to the runup to the Great Recession. In the 2000s decade, mortgage delinquencies generally kept falling until the fourth quarter of 2004. After that point, this payment failure rate kept rising until it peaked at 11.54% in Q1 2010.
Now consider what happened last decade. From Q3 2016, delinquencies consistently declined to Q4 2019, when they bottomed. Since then, as the pandemic disrupted the world, delinquencies are rising.
But it’s not just the rise of this rate but rather it’s acceleration. Between Q4 2019 to Q3 2020, there was a 20% increase in mortgage delinquencies. Prior to the Great Recession, between Q4 2004 and Q3 2005 – in other words, the same time interval – delinquencies increased by 13%.
It Can Happen Again
If you read, listen or watch content from real estate analysts, most of them will adamantly disagree that another housing crash will occur. About the only way that could happen is if interest rates rise, creating a deflationary effect. But that’s not what’s happening. Interest rates are low, and possibly going lower.
That’s inflationary, which will boost asset prices like real estate. Frankly, that’s what I thought too until I did some more digging.
Long story short, interest rates could be a red herring. It’s what’s associated with interest rate changes, either inflation or deflation, that’s the driver. So, whether rates go up or down won’t matter if inflationary or deflationary outcomes lose correlation to interest rate modulation.
Ultimately, then, it’s the velocity of money (or lack thereof) that could determine where housing prices go. It’s very possible we could see asset deflation even with low interest rates because money velocity has dropped to crisis levels.
In my opinion, all this crisis needs is a tipping point, and a weak labor market moving forward could provide it. While I’m not trying to scare you, housing is a little wilder than you may think.
As for IPOB stock, here’s my updated assessment. When I last wrote about it on Oct. 28, shares closed at $17.36. It’s much higher than that now, which means you may want to take some off the board.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
