Online Real Estate Company Opendoor Stock Is Soaring: Here's Why

Investing

Published: November 6, 2023 9:04 am

Following a burst of enthusiasm after reporting earnings late on Thursday, house-flipper Opendoor Technologies Inc. (NASDAQ: OPEN) dropped 5% to end the day at $2.09. The stock is making a come-back Monday morning, likely on investors making a bet that the Fed won’t be raising interest rates any time soon.

Kansas City Blues

That may be the case, but the real-estate market took something of a beating last week. A federal jury in Kansas City found that some real estate brokerages and the National Association of Realtors should pay $1.8 billion in damages for conspiring to keep agents’ commissions artificially high.

This is a boost for Opendoor. One of the arguments plaintiffs made in the trial was that the buyer agents were ‌paid half of the 5% to 6% commission to sellers’ agents stifled competition. The competition in this case included online real estate sites where homebuyers were able to locate homes without an agent’s help. Why should sellers have to pay for a service that homebuyers don’t need?

Return of the Adjustable-Rate Mortgage

Another good sign for Opendoor, and indeed for the housing market overall, is the return of the adjustable-rate mortgage. ARMs, as they’re known, generally have a lower initial interest rate than a 30-year fixed-rate mortgage. A 5/1 ARM, for example, starts with a fixed rate for five years then makes a one-time switch to an adjustable loan. But wait, there’s more.

If, for example, the initial rate on the ARM loan is 7%, and the interest rate for a home loan declines to 5% over the five-year fixed part of the loan, the interest rate on the loan falls to 5% at the end of the fixed portion of the loan term. It can go even lower because most 5/1 ARMs adjust annually, although some adjust more and others less often.

If (when) fixed-rate mortgage loan costs fall below the ARM rate, ARM holders can pay off their adjustable loans and lock in a lower-cost fixed-rate mortgage.

According to Mortgage News Daily, 5/1 ARM loans carried a contract interest rate of 6.77% last week for a conforming loan (up to $726,000). The fixed rate for a 30-year fixed-rate loan ‌closed the week at 7.86%.

How Opendoor Benefits

The combination of Kansas City jury verdict and lower interest rates, especially for ARMs, are giving Opendoor an unexpected lift. In the event, investors are ignoring the company’s issued downside revenue guidance for the fourth quarter. That’s virtually unprecedented in recent days.

Opendoor guided revenue to $800 million to $850 million, well short of the consensus estimate for $1.3 billion in fourth-quarter sales.

Opendoor stock traded up by nearly 9% in Monday’s premarket session and ‌dipped to around 8.1% at around 7:30 a.m. ET, to trade at $2.26 in a 52-week range of $0.92 to $5.41.