Don’t Be Fooled By This Temporary Bounce in Opendoor Stock

• Like other growth/tech plays, OPEN stock has bounced back in recent weeks
• Changes in the housing market could have an effect its performance
• In this seller’s market it may be wise to sell Opendoor ahead of a potential downturn

Opendoor (NASDAQ:OPEN) stock looks to be recovering from the negative reaction to earnings and the stock market selloff that sent it to just over $6 per share.

As investors warm back up to growth/tech plays, shrugging off inflation, interest rates and other concerns, this iBuyer of residential real estate has climbed back up to around $8.50 per share. You may see this as just the start of the hard-hit stock’s recovery.

The negative reaction to earnings notwithstanding, plenty remain very bullish on the company’s prospects. However, it may be premature to say shares have bottomed out and that Opendoor is making a compeback. In fact, with the housing market cooling down, it may be at risk of taking a trip back to around $6 per share (or lower) a few months down the road.

While tight supply is for now helping to outweigh higher interest rates, the company could find itself with too many houses, and not enough buyers.

A Closer Look at OPEN Stock

In February, investors reacted negatively to Opendoor’s latest quarterly results. While beating on revenue, and guiding for higher-than-expected revenue for the current quarter, losses were wider than anticipated.

Worse, the company’s gross and contribution margins dropped quarter-over-quarter even as revenue rose by around 69% on a sequential basis (from $2.26 billion to $3.82 billion). Since then, however, OPEN stock has bounced back as a result of the overall rebound in speculative growth stocks.

The market-wide rebound followed the Federal Reserve’s latest comments on its rate hike plans.

In addition, the market may be warming back up for another reason. With demand outstripping supply, so far higher interest rates aren’t slowing down the rate of house appreciation. Opendoor right now is listing the properties it buys directly from homebuyers at a record 17% premium to its purchase price.

Many see this as a possible sign that the company will see margin improvement compared to preceding quarters. Then again, that may not be the case a few months down the road as the seller’s market prevails. Soon, changes in the housing market environment could start working against OPEN.

Rising Rates, Falling Sales and Opendoor Stock

In February, existing home sales fell by 7.2% compared to January. After hitting record lows at the start of 2022, total housing inventory is inching back up as well. So far, the real estate industry has shrugged this off as a sign that the hot housing market is set to soon cool down.

After all, while down big month-over-month, home sales are down just 2.4% year-over-year. This is vastly exceeded by the year-over-year decrease in supply (15.5%).

This explains why we’re seeing higher sales prices, but falling sales. However, you may not want to assume this dynamic will last. With 30-year mortgage rates now approaching 5%, we could see an increased drop in housing demand.

In turn, along with a slow uptick in inventory, the market could begin to normalize. The above-mentioned high premium to purchase price could prove to be temporary. Opendoor may have to lower prices in order to move inventory.

Holding times could also go up as well, although it may be able to lean on a fast-growing area of its business (selling homes to real estate investors) to make up for softer demand from would-be homeowners.

There’s a strong chance it continues to see its margins move lower. Factor in the leverage the company took on in the past year (as my InvestorPlace colleague Mark Hake broke down last month), and just a moderate cooldown in the real estate market could mean big trouble for Opendoor.

The Bottom Line

It may still seem like there’s no end in sight with runaway housing prices, but don’t view this as a sign that now’s a great time to buy Opendoor shares.

In the months ahead, a slow rise in inventory and a larger drop in demand could bring an end to what remains a seller’s market.

Even a moderate slowdown in housing may result in outsized losses for OPEN stock. With this, cash out if you own it, hold off if you haven’t bought it yet.

On the date of publication, Thomas Niel 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.