The remarkable explosion in housing prices seemingly defies logic. True, many people just want to buy a home, especially with millennials getting older and looking to settle down. That has bolstered Opendoor Technologies (NASDAQ:OPEN), with Opendoor stock rising on the convenience of its next-generation homebuying platform. Still, lingering questions about economic stability remain, which makes this a tricky name.
On the positive end of the spectrum, SPAC fever has taken over the market, driving up the shares of trending companies that have benefitted from the reverse-merger process. Of course, Opendoor was one such SPAC, recently completing its merger with blank-check firm Social Capital Hedosophia Holdings Corp. II.
Unlike some speculative offerings out there, Opendoor stock is tied to a legitimately compelling business. It draws comparisons to firms like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) because it marries technology with the staid and onerous processes of real estate transactions. In my opinion, another InvestorPlace columnist, Lou Carlozo, gave the most succinct explanation of Opendoor’s business model:
Just as that ride hailing business upended a sector exclusively controlled by taxis and limousines, Opendoor seeks to revolutionize real estate by creating what’s called an “iBuying” platform. The gist is that by transacting online, sellers will enjoy lower fees and more precise quotes generated by algorithm. Opendoor buys and then resells the real estate, making money on the spread. Revolutionary? You bet.
Critically, with the company’s iBuying innovation, it’s now possible for sellers to get an instant offer on their homes and avoid physical showings of their abodes. That was extremely convenient prior to the novel-coronavirus outbreak. But in the new normal, contactless transactions have become a precious commodity.
Additionally, sellers can schedule their moves precisely and on their own terms. That way, they don’t have to make payments both on their old homes and the ones they’re moving into.
The Economy Could Be a Problem for Opendoor
In light of the convenience galore provided by the company, you can see why so many people have piled into Opendoor stock. So far this month, the shares are up nearly 23%. I’ll take that kind of performance any day.
Further, there are powerful incentives that can enable Opendoor stock to continue its ridiculous momentum. First, the negative real interest rate environment should theoretically support speculation in equities. Under this unusual paradigm, there’s a penalty for those who hold cash. Thus, the “smart money” is doing the rational thing: avoiding the guaranteed penalty by putting its funds to work.
As well, you have everyone else – especially newbie investors who may not be as sophisticated as the “smart money” folks – following what the rich are doing, leading, for now, to a self-fulfilling prophesy i.e. huge stock gains.
Second, the affluent among us are making the best move ever by securing more real estate. Indeed, as the Washington Post notes, in an ecosystem where money is so cheap, you’d be stupid not to acquire property if you have the funds to do so.
Naturally, this leaves many millennials desperate. As they watch prices go up, up and away, they’re saying the heck with it and diving in. If they can’t get into a home in a desirable metropolitan area, they can move to other areas that are cheaper: telecommuting affords a new wave of options.
These and other factors fundamentally bolster the bullish argument for Opendoor stock. However, I worry about the sustainability of this dynamic.
For instance, I can’t help but notice that the sequential quarter-over-quarter growth in the mortgage delinquency rate averaged 8.91% between Q1 and Q3 of last year. In the runup to the Great Recession (Q4 2006 to Q2 2007), the average delinquency growth rate was 9.7%.
I think you know where I’m going with this.
Now I’m not saying that there will be another housing crisis like the one we saw roughly a decade ago. But I think that investors planning on buying a great deal of Opendoor stock may want to watch delinquency rates like a hawk. Doing so might save them from a world of hurt.
Don’t Underestimate SPAC Fever
Having said that, I’m not recommending that you short OPEN stock. That would be dumb. We’re living in unprecedented times, which means that betting against a hot company could be detrimental to your portfolio.
A perfect example is GameStop (NYSE:GME). I suggested that readers may want to look into that stock…back when the shares were trading for a little over $4. At these prices, however, I don’t know if they are still a good buy. But the market has a mentality of its own, and I’m not going to argue with it.
Having experienced firsthand this irrationality, I know that Opendoor stock could also soar tremendously. However, the key difference is that, with Opendoor, we’re dealing with home purchases, not a consumer-discretionary item. Changes in the housing market can lead to seismic waves throughout the economy.
The Bottom Line
For the speculative trader, Opendoor can certainly open some opportunities. But those who buy the shares should watch those key economic indicators because they might let them know when they should unload their positions.
On the date of publication, Josh Enomoto held a long position in GME.
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.