In a bit of perhaps unsurprising news, Opendoor (NASDAQ:OPEN) – a company that leverages the iBuyer business model to facilitate lightning-quick real estate transactions – announced layoffs impacting 18% of its workforce. Management cited severe headwinds pressuring the housing market, particularly the rising interest-rate environment. However, OPEN stock gained about 5% on Thursday afternoon.
Nominally, the job cuts amount to approximately 550 people. Fundamentally, according to Barron’s, Opendoor struggles “with the reality of sky-high mortgage rates.” Subsequently, the sharp rise of borrowing costs slowed the once-booming real estate market.
Per data from Freddie Mac, the average rate on a 30-year fixed rate loan was 6.95% as of Nov. 3. As Barron’s pointed out, a year ago, it was less than half that rate.
“The reality is, we’re navigating one of the most challenging real estate markets in 40 years and need to adjust our business. To manage through the turbulence in the market, we’ve worked quickly over the last two quarters to reduce our operating expenses,” wrote Opendoor CEO Eric Wu in a blog post.
Still, OPEN stock popped higher in afternoon trading amid the major equity indices’ dour performances. Generally speaking, layoff announcements tend to spark a positive response in the underlying securities, likely due to profitability expectations from reduced overhead. However, evidence indicates the longer-term impact of such actions is questionable.
The iBuyer Business Model Poses Threats to OPEN Stock
Undoubtedly, macroeconomic dynamics that forced the Federal Reserve to unwind its balance sheet to address soaring inflation contributed massively to the present housing crisis. With the central bank continuing to pile on its rate hike agenda, OPEN stock naturally faces severe thunderstorms.
After all, higher borrowing costs lead to reduced buyer sentiment. And that translates to a reduced total addressable market for Opendoor, leading to substantial challenges for OPEN stock. But that’s not the only negative catalyst worrying observers on the sidelines.
As a Wired article posted almost a month ago stated, “iBuyers are vulnerable to swings in the market. So what amounts to an undetectable tremor for individual buyers can become an almighty rumble for iBuyers.”
In particular, companies like Opendoor “use algorithmic pricing powered by reams of big data to offer house sellers a below-market average deal in exchange for completing sales quickly. They then flip the properties and bank the profit.”
Unfortunately, convincing prospective sellers to accept a price lower than what a traditional brokerage firm can fetch presents myriad problems. As well, with economic activity likely to slow down if rate hikes continue, the urgency to move diminishes. Thus, sellers have more time on their hands, meaning the tradeoff for convenience in exchange for a lower price doesn’t make much sense.
Subsequently, investors need to be very careful about engaging OPEN stock. Sadly, the reduced headcount does not solve fundamental vulnerabilities impacting Opendoor in the current economic paradigm.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.