The U.S. Housing Market Could Be Crushed as Home Flipping Returns
The return of home flipping might sound like a positive development for real estate, but nothing could be further from the truth as COVID-19 continues to drag down market sentiment. | Image: AP Photo/Gene J. Puskar
- Opendoor decides to restart.
- Housing demand in the U.S. has tanked, and credit has tightened.
- Job losses add to the uncertainty surrounding the market.
As millions of Americans continue to file for unemployment benefits due to the lockdown, the housing market has started feeling the heat. Home sales have started heading south in good measure, but home-flipping specialist Opendoor believes that now is a good time to start buying homes.
Opendoor is in the business of flipping houses for a living–buying a property and selling it for a nice profit–so it is not surprising to see why it is encouraging home buying once again. But doing so could accelerate the housing market’s fall into a full-blown crisis.
Opendoor gives baffling reasons to restart operations
Opendoor believes that its business model of allowing owners to sell their houses without having to resort to open houses or in-person closings could come in handy under the current circumstances. Speaking to Bloomberg in an interview, CEO Eric Wu said :
The value proposition we provide to customers is to help them move with certainty and convenience. We should be willing to take on some of that exposure and we should price homes appropriately due to that risk.
Opendoor has decided to restart its operations in Phoenix and wants to reopen in another 20 markets in the coming months.
But Opendoor’s confidence in its business model could be shaken sooner than later. After all, if it were so confident in its business model, there would have been no need to suspend operations in March and fire over a third of its staff.
Reality is going to strike hard as the COVID-19 outbreak has brought the economy to a grinding halt. Over 30 million Americans have lost their job in the last six weeks, wiping out all the gains that were made since the Great Recession .
Last month, a survey by the Economic Policy Institute revealed that three to four people were unable to file for unemployment claims for every ten people who managed to do so. This means the actual number of people filing for unemployment insurance would have been much higher.
Despite this gloomy economic scenario, Wu believes that people will start buying homes once again because of some perplexing reasons:
There is still demand for people to move. That could be driven by the fact that people need more space because they work from home, or they want to move out of the middle of the city because they want something less dense.
Home flipping would be a curse for the market right now
The plunge in home sales indicates that housing demand is drying up, and the market may not be back on its feet anytime soon. Banks are tightening credit norms, given the dwindling state of employment. Potential home buyers may not get credit easily as fear-gripped lenders worry about the possibility of borrowers losing their jobs.
Amid all this, Opendoor believes that people will come back and boost the housing market even as the country struggles to contain the pandemic. The company needs all that optimism as its business model of taking on debt for buying homes does not allow it to hold inventories for long.
If people don’t come back to buy homes, Opendoor could fall under financial stress. In that scenario, the company may have to flood the market with its inventory at cheap rates. After all, Opendoor bought 19,000 homes last year, and it was sitting on an inventory of 3,800 homes as of March.
The odds are stacked against Opendoor right now as the National Association of Realtors predicts a 14% crash in home sales this year. Real estate marketplace Zillow predicts that home prices in the U.S. could drop between 3% and 4% this year in a pessimistic scenario. But Zillow’s gloomy prediction seems to be laced with optimism as we see a financial crisis that’s worse than what we saw in 2008.
The U.S. housing market lost over a third of its value during that period , so Zillow’s prediction seems overly optimistic in comparison.
Despite Wu’s optimism, the very basis of the company’s business–buying homes and flipping them at a higher price for a profit–doesn’t seem feasible under the current circumstances.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
