Why the Math Doesn’t Work for Opendoor’s (OPEN) Unusual Options Volume

Absent any context, it might seem strange to have any hesitation toward real estate innovator Opendoor Technologies (OPEN). Utilizing an iBuyer model or the leveraging of artificial intelligence and machine learning to help flip homes for profit, Opendoor appears a brilliant idea. To bolster this image, OPEN stock skyrocketed nearly 83% since the January opener.

As well, the novel real estate enterprise represented one of the highlights of Barchart.com’s screener for unusual stock options volume. Specifically, total volume for Opendoor reached 57,557 contracts against an open interest reading of 382,001. Further, the delta between the Friday session volume and the trailing one-month volume level hit just under 200%.

Moreover, the dynamic above featured a decidedly bullish tilt. Call volume pinged at 40,097 contracts against put volume of 17,460. Therefore, the put/call volume ratio posted at 0.44, broadly indicating bullish interest. Again, outside of any context, this wouldn’t be too terribly surprising given the outrageous performance of OPEN stock.

Of course, with the wider context included, the narrative doesn’t seem so enticing. In the trailing year, OPEN stock gave up 80% of equity value, a stunning loss. Throughout its entire lifecycle as a public entity, OPEN plunged nearly 82%.

While it’s always possible that Opendoor could engineer an astounding recovery, the probability seems limited. Below are three reasons why.

The Business Doesn’t Work Right Now for OPEN Stock

Take away the glitz and glamor of AI, algorithms and machine learning and what you have with Opendoor is a home flipper. Indeed, focusing too heavily on the technical aspects undergirding OPEN stock detracts from the dependency associated with the home-flipping business. Put another way, the underlying company depends on a decidedly bullish cycle for the real estate market.

During the heyday of the post-pandemic housing boom, OPEN stock made plenty of sense. To eliminate the hassles involved with traditional processes, home sellers can quickly get an offer for their home and let the iBuyer deal with all the nonsense. In turn, the iBuyer offers a lower purchasing price in exchange for the convenience. Both sides are happy.

In the current cycle, the iBuyer business model doesn’t make sense. With the Federal Reserve committed to tackling a stubbornly high inflation rate, the associated spike in benchmark interest rates slows economic activity. In turn, less incentives exist for people to move due to the reduced opportunities.

As well, The New York Times reported that nearly half of homes in the U.S. stood as “equity rich” in early 2022. The desperation that sprouted during the Great Recession simply isn’t here (at least not yet). Therefore, iBuyers will likely find few willing sellers to make this business model work.

Wage Growth Can’t Keep Pace with Home Prices

According to data from the U.S. Bureau of Labor Statistics, the average hourly earnings of all employees increased from $28.37 in December 2019 to $32.93 in December 2022, a delta of 16% up. While significant, it can’t keep pace with the boon in the housing market.

Per the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, in the fourth quarter of 2019, the average sales price of houses sold pinged at $384,600. Fast forward to Q4 2022 and this metric soared to $535,800. That’s over 39% up – and that’s just a national average. For some major metropolitan areas, this figure stands much, much higher.

Unfortunately, with wage growth unable to keep pace with home prices, that’s going to crimp demand for OPEN stock. Look, this isn’t about casting aspersions on Opendoor necessarily. Rather, the math has to work, especially when you’re talking about a high-ticket item like a residential unit. It just doesn’t in this case.

As well, households must spend more on necessities such as food, energy and transportation. And we haven’t even talked about the spike in mortgage rates. Add it all up and fewer people simply exist that can qualify for financing a home, let alone inking a deal.

Tech Layoffs Hurt Demand

While the employment market remains robust – much to the chagrin of the Fed which is eager to curb inflation – this only tells half the tale. The other side of the coin centers on the dark clouds of technology sector layoffs.

One by one, major tech enterprises have announced significant cuts to their workforce. And we’re not talking about throwaway positions but rather jobs that led to envy-inducing careers. While this sharp hit to the white-collar job market imposes significant, wide-reaching consequences, it will likely make a pronounced impact on the housing sector. By logical deduction, this wouldn’t be helpful for OPEN stock.

True, the latest jobs report suggests that anyone that really wants employment can find it. However, the Bureau of Labor Statistics shows that in January 2023, the year-over-year increase in average hourly earnings came out to 4.43%. In January 2022, this YOY lift was 5.72%. And one year earlier, the metric stood at 5.24%.

In other words, while interested workers are finding jobs, the growth in income has decelerated. And that makes sense because of the tech sector layoffs. However, with fewer people available with excellent income, OPEN stock seems unusually risky. Therefore, investors should approach with caution.

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