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Market making for houses

Matt Levine’s latest Money Stuff column does a good job explaining why a lot of smart people are trying to figure out a market-making model for homes (see companies such as Opendoor):

People want to apply the market-making model to homes. This makes sense. Buying or selling a home is a long slow uncertain annoying process. The value of immediacy is high, especially for a seller. If you decide to sell your house and go to a website and spend 10 minutes filling out a form and then someone wires you cash for the value of your house, that is much much much better than hiring a broker and listing the house and holding open houses and so forth. You’d be willing to pay a market maker a lot for that immediacy. (By selling your house to the market maker at a discount.) And if the market maker is good at acquiring houses, then it will have a lot of inventory, which will make it a good seller of houses. If you want to buy a house, you will naturally go to the market maker’s website, because it’s where the houses are.

Levine also explains why a market-making model is that much more difficult for homes compared to things like stocks. In a slowing/slumping housing market, it’s pretty easy to lose money as a market maker. (That is, unless you can somehow accurately predict that a slump is coming.)

Last month, Opendoor lost money on 42% of its home transactions. This is a result of them buying homes from people when prices were X and then selling these homes many months later when prices were less than X.

However, I’m not so sure that this has to be an existential problem. Opendoor’s primary value proposition is instant liquidity for homeowners. And this value proposition is at its strongest when the market is in fact slumping. Because the alternative — selling with a broker — is less attractive.

So the current environment may eventually turn out to be a boon for Opendoor. Of course, we won’t know for a number of months.

Full disclosure: I am long $OPEN. And yes, it is painful right now.

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