Opendoor Technologies Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

Key Takeaways

  • Delivered $2.0 B in Q2 revenue, exceeding the high end of guidance by 7% with 99% of the March–June 2022 offer cohort sold or under contract by quarter end.
  • New-book homes achieved a 10.6% contribution margin in Q2, and management expects overall positive contribution margin in Q3 and to reach the 5–7% target by Q4 2023.
  • Adjusted EBITDA loss narrowed to $168 M in Q2 from $341 M in Q1, beating guidance and reflecting improved cost discipline with adjusted operating expenses projected at ~$100 M in Q3.
  • Strengthened the balance sheet with $1.2 B in unrestricted cash, repurchased convertible notes at a ~50% discount, and maintained $10.1 B in non-recourse borrowing capacity.
  • Partnership channels (homebuilders, agents and online platforms) grew 78% sequentially to represent 40% of acquisition contracts in Q2, offering fixed-cost customer acquisition and bolstering top-funnel growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Opendoor Technologies Q2 2023
00:00 / 00:00

There are 12 speakers on the call.

Operator

Welcome to the Opendoor Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded.

Operator

I would now like to turn the conference over to your speaker today, Whitney Kukulka, Investor Relations with Blueshirt Group. Please go ahead.

Speaker 1

Thank you and good afternoon. Details of our results and additional management commentary are available in our earnings release and shareholder letter, which can be found on the Investor Relations section of our website at investors. Opendoor.com. Please note that this call will simultaneously be webcast on the Investor Relations section of the company's corporate website. Before we start, I would like to remind you that the following discussion contains forward looking statements within the meaning of the federal securities laws.

Speaker 1

All statements other than statements of historical fact are statements that could be deemed forward looking, including, but not limited Two statements regarding Opendoor's financial condition, anticipated financial performance, business strategy and plans, Market opportunity and expansion and management objectives for future operations. These statements are neither promises nor guarantees and undue reliance should not be placed on them. Such forward looking statements involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results To differ from forward looking statements can be found in the Risk Factors section of Opendoor's most recent annual Report on Form 10 ks for the year ended December 31, 2022, as updated by our periodic reports Any forward looking statements made on this conference call, including responses to your questions, are based on management's reasonable current expectations and assumptions as of today and Opendoor assumes no obligation to update or revise them whether as a result of new information, future events or otherwise, except as required by law. The following discussion contains references to certain non GAAP financial measures.

Speaker 1

The company believes these non GAAP financial measures These non GAAP financial measures to the most directly comparable GAAP metric, please see our website at investor. Opendoor.com. I will now turn the call over to Keri Wheeler, Chief Executive Officer of Opendoor.

Speaker 2

Good afternoon. Also on the call with me today is Christy Schwartz, our Interim Chief Financial Officer and Dodd Fraser, President of Capital and Open Exchange. Opendoor's vision is to build the most trusted e commerce platform for residential real estate where homebuyers and sellers can transact with simplicity and certainty. Regardless of the macro environment, life and home transactions continue and we're committed to being the 1st and most trusted place that people look to when considering their move. In navigating the current environment, we're leveraging the lessons we've learned and focusing on what we can control.

Speaker 2

We've made significant progress in strengthening our offering, driving cost efficiencies and managing risk. We're building a healthy new book of inventory that demonstrates our ability to generate positive unit economics in what continues to be an uncertain time in the U. S. Housing market. We remain focused on making investments in durable growth levers In our pricing and operations platforms that will benefit us for years to come, we're doing what we've always done.

Speaker 2

We're leading with the consumer experience as we innovate, build and adapt Opendoor to be an all weather product and the best option for millions of people who want to buy or sell a home. We have intentionally moderated our acquisition pace this year to manage risk. We've maintained above average spreads, resulting in lower conversion Higher customer acquisition costs and our direct to consumer paid marketing channels. We've leaned into our partnerships with homebuilders, agents and online real estate platforms. These channels have fixed customer acquisition costs and thus are highly efficient and represent durable long term partnerships for us.

Speaker 2

In Q2, acquisition contracts and partnerships grew 78% sequentially and represented 40% of total acquisition contracts. We expect these partnerships to continue to grow. However, we also plan to increase our paid marketing to drive additional direct to consumer volume as we see more market stabilization and reduced spreads. Partnerships and paid marketing drive our top of funnel growth, bringing true sellers and registered sellers, defined as those who have received an offer but have not yet sold their home to Opendoor. Not everyone is a true seller at the time they request an offer, but we treat everyone as a possible future seller.

Speaker 2

Reengaging our base of registered sellers Until they decide to sell their home requires de minimis incremental costs. Three quarters of acquisition contracts in Q2 were from sellers who didn't accept their initial offer, but accepted a subsequent one. We believe that growing our registered customer base, which gives us access to true sellers whenever they do choose to sell, We'll continue to be an important source of growth. Direct to consumer paid marketing remains an important channel for us, delivering 60% of our contracts in Q2. However, given the higher spread environment, we have prioritized limited but highly effective marketing investments such as creative ad campaigns, brand media and consumer and agent influencer programs.

Speaker 2

Despite reducing marketing spend nearly 80% year over year in Q2, our aided brand awareness remained flat in the quarter. As we think about durably reducing spreads and reaccelerating growth, Much is within our control, but we need to be nimble and reactive to what we're seeing in the broader housing market. The housing macro has improved since the beginning of the year, But sitting here today, we're looking for signals of further market stabilization, including a more certain outlook for HPA. We've taken prescriptive action on the things we can control as we navigate ongoing uncertainty. We are focused on investments to improve our pricing accuracy, Inventory management and overall cost structure.

Speaker 2

These actions are intended to durably reduce spreads charged to customers while still achieving our target contribution margin. An example is our continued investment into home condition, which relies on computer vision, AI based condition modeling and interior assessments, all of which give us more structured data to improve our overall data insights, which in turn informs home level pricing and pricing model accuracy. We remain steadfast in our mission to power life's progress one move at a time. The actions we are taking today reflect our commitment to returning the business to adjusted net income positive and will allow us to emerge from this cycle more resilient and positioned for market leadership. There's still much to do and we're heads down as we continue to build a generational company that will transform home transactions for many years to come.

Speaker 2

With that, I'm going to turn the call over to Kristi to review guidance and financial results.

Speaker 3

Thank you, Carrie. Our second quarter results We delivered $2,000,000,000 of revenue in the 2nd quarter. This exceeded the high end of our revenue guidance by 7%, driven by strong market clearance rates and the sell through of our longer dated homes. Notably, 99% of the Q2 cohort, which is homes we made offers on between March June of last year, was sold or under resale contract by quarter end. On the acquisition front, we purchased 2,680 Homes in the quarter, down 81% versus Q2 of 2022.

Speaker 3

The decline versus the prior year comes primarily as a result of elevated spreads embedded in our offers since June of last year, coupled with sellers remaining on the sidelines. New listings in our buy box declined 21% year over year in the Q1 of 2023 and continue to decline to 31% year over year in the Q2. We reduced the average spread offered between the 1st and second quarter of 2023 to Pricing model improvements related to home condition, reduced holding and selling costs due to shorter expected holding times and a modest improvement in our view on home prices. Even though spreads are still at elevated levels, The reduction translated to a 53% increase in acquisition volumes from Q1 to Q2 2023. Our Q2 contribution margin was negative 4.6% versus positive 10.1% in Q2 of 2022 and negative 7.7 percent in Q1 of 2023.

Speaker 3

These results were driven by the negative contribution margin performance of the old book of inventory, which represented 57% of our resale mix. Our new book of homes continues to show strong margin performance, With this cohort generating gross margins of 14.4% and contribution margins of 10.6% in the 2nd quarter. We expect this group of homes to perform in line with our revised contribution margin target of 5% to 7% once fully sold through. We expect contribution margin to return to positive in the Q3 when the new book of inventory composes a majority of resale. Adjusted EBITDA loss was $168,000,000 in the second quarter, inclusive of our previously Recorded inventory valuation adjustments of negative $156,000,000 This beat the high end of our guidance range of an adjusted EBITDA loss of $180,000,000 and is an improvement from an adjusted EBITDA loss of $341,000,000 in Q1 of 2023.

Speaker 3

Adjusted operating which we define as the delta between contribution margin and adjusted EBITDA was $78,000,000 in Q2, down from $100,000,000 in Q1 of 2023 and $204,000,000 in Q2 of 2022, driven by reduced marketing spend, operational capacity and fixed expenses beginning in the second half of last year. We expect adjusted operating expenses to be approximately $100,000,000 in the Q3 of 2023. The sequential increase from the 2nd to 3rd quarter reflects our expectation to begin rebuilding inventory at a modest pace in the 3rd quarter. Turning to our balance sheet. We ended the 2nd quarter with $1,100,000,000 in total shareholders' equity, which is an increase of $50,000,000 from the Q1 of 2023.

Speaker 3

This was partially driven by our convertible note repurchase in May, which was done at a substantial discount to face value. Combined with the repurchase we completed in March, this reduced our convertible note obligation by almost 50% from $978,000,000 to 510,000,000 We ended the 2nd quarter with $1,600,000,000 in total capital, which includes $1,200,000,000 in unrestricted cash, cash equivalents and marketable securities and $269,000,000 of equity invested in homes and related assets, net of inventory valuation adjustments. At quarter end, we had $10,100,000,000 in non recourse asset backed borrowing capacity comprised of $5,400,000,000 of senior revolving credit facilities And $4,700,000,000 of senior and mezzanine term debt facilities, of which total committed borrowing capacity was 4,300,000,000 During the quarter, we wound down the last of our 2 dedicated Q2 offer cohort financing facilities given the substantial progress we've made in selling through these homes. Turning to guidance, we expect 3rd quarter revenue to be between $950,000,000 $1,000,000,000 and adjusted EBITDA loss to be between $60,000,000 $70,000,000 We expect the 2nd quarter to mark the last quarter of negative contribution margin with positive contribution margin levels beginning in Q3 when our fresh book of inventory comprises the majority of our resales.

Speaker 3

We expect to perform within our 5% to 7% contribution margin target beginning in Q4 of 2023. We are managing our business to return to positive adjusted net income, which is our best proxy for operating cash flow, and we believe we have the cost structure and balance sheet in place to do so. We expect to reach ANI breakeven at steady state annual revenue of $10,000,000,000 or approximately 2,200 acquisitions and resales per month at our target contribution margin range of 5% to 7%.

Speaker 1

While the overall state of

Speaker 3

the housing market has improved relative to our expectations at the beginning of the year and we anticipate opportunistically making modest Spread reductions in the back half of twenty twenty three. We are continuing to operate with elevated spreads to account for ongoing home price uncertainty. We expect to return to revenue growth in 2024. While getting to ANI breakeven as an important destination, it is not the end of the journey. Given the inherent lag in our business between home acquisition and resale, the period in which we reach the AMI breakeven inflection point will be Active by the pace at which we lean into growth.

Speaker 3

If our acquisition pace exceeds our resale pace, we would recognize certain acquisition and inventory holding costs such as marketing, financing and variable SG and A costs before realizing the corresponding revenue. The second half of twenty twenty three will showcase our continued investments in our pricing and operations platforms, durable growth levers and improving our overall cost I'd like to thank our Opendoor team members for their pursuit of these initiatives and their dedication to serving our customers. With a reduced cost structure, healthy book of inventory and strong capital position, we are very encouraged by the go forward outlook. I'd now like to turn the call over to the operator to open up the line for Q and A.

Operator

Thank you. Please stand by while we compile the Q and A roster. Our first question comes from the line of Dae Lee with JPMorgan. Your line is now open.

Speaker 4

Great. Thanks for taking the questions. I have 2. So first one on the partnership. It sounds like it's a pretty core component to your second half Appreciate it on growth in 2024 and it looks like the mix grew from about a 3rd last quarter to 40% this quarter.

Speaker 4

Could you help us unpack What drove that growth? And as you look ahead, how should we think about the mix of partnership And then secondly, on your adjusted OpEx stepping up quarter over quarter, I think you talked about Growing your inventory in 3Q as the main drivers of this. Help us understand like what incremental costs are actually going into that? Is it More about Bransman or do you need more headcount to drive more inventory? Thank you.

Speaker 2

A. J, it's Carrie. I'm happy to take the partnership question. I'll hand over to Christy to talk about adjusted OpEx. I missed you a little bit in that first question, but I think I got the gist of it, so I missed something.

Speaker 2

Joe, please jump in. On the partnership side, for us, just as a reminder, partnerships include homebuilders, Includes agents and includes the online real estate platforms. So it's for us Zillow, Realtor and Redfin. And we like these channels for a variety of reasons, one of them being that they are fixed from a customer acquisition cost standpoint. So they are agnostic to spread And durable kind of in all environments.

Speaker 2

As you noticed, it was a really nice growth driver of contracts for us in the quarter. It was 40% of our overall contract mix. It grew almost 80% in total quarter on quarter. We don't break out the various Parts of what makes up partnerships, but I would say, if you think about the evolution of those over time, we've been in Business has been owned by this for a long time and it's a great channel for us that is a trading customer within a natural use of the Opendoor product. Aegion's also a group that we've been working with for a long time, but as we moved into an elevated spread environment, we really Recognize the power of that partnership with agents and have leaned into that channel and driven incremental growth from them over the last year plus and we Do you expect to do so?

Speaker 2

And then the last part of that is online real estate, which for us is the most nascent of the 3. And we are Just ramping really the Zillow relationship, for example, 5 to 25 markets in the last quarter, and that's just starting to grow really nicely. So Probably in that order in terms of growth without giving the specifics of the actual mix. Kristy, do you want to talk about the OpEx, please?

Speaker 3

Yes, absolutely. So I'll start by saying that we're still very focused on optimizing costs and we are making progress throughout the P and L in that effort. As a reminder, adjusted OpEx is the delta between contribution profit and adjusted EBITDA. And so the dip in adjusted OpEx that you saw in the 2nd quarter is a reflection of the relationship between contribution profit and adjusted OpEx. When inventory is growing, adjusted OpEx will bear additional costs related to that growth.

Speaker 3

Conversely, when inventory is contracting as it did in 2Q, adjusted OpEx will benefit from the movement of some of these costs, specifically Holding costs related to the resale cohort to contribution margin. As we begin rebuilding inventory at a modest pace in the 3rd quarter, We expect $100,000,000 per quarter to be an appropriate estimate.

Speaker 4

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Jason Helfstein with Oppenheimer. Your line is now open.

Speaker 5

Hey, thanks. This is Chad on for Jason. So I mean, now that it sounds like you're starting to at least lean back a little bit into growth with Kind of housing market prices stabilizing on a sequential basis. How should we think kind of taking a step back about The normalized growth of the business, with the bad cohort gone and the housing market seemingly bottomed. And then I have one more.

Speaker 5

Thanks.

Speaker 2

Hey, it's Carrie. Let me talk a little bit about that. Normalized growth, right? Just some commentary, just given what we've weathered the last couple of years, which is a lot of growth and then obviously weathering the cycle. I'd say right now, just as a reminder, We expect to be seeing for the back half of this year is a pretty steady pace at around 1,000 acquisitions per month for 3,000 homes per quarter.

Speaker 2

And as we lean into the back half of the year, like into Q4, when seasonality becomes a tailwind, right now it's a headwind, We will start to reduce spreads. That will allow us to drive more volume. It will allow us to increase our paid marketing spend in a more efficient way. Obviously, we'll continue to lean into the partnership channels we've been talking about. Those will continue to grow and that will drive more volume into next year.

Speaker 2

So that's really the near term growth outlook. The next marker for us is to double volumes, and that's where March and June for the middle of next year will be back to kind of that steady state breakeven Adjusted net income target we have, 1,000 to 2,200 contracts for acquisitions.

Speaker 5

Okay. Thanks. That's helpful. And then, any update on Opendoor Exclusives? It sounds like you're just kind of still in testing phase there.

Speaker 2

Yes. We were continuing to focus on perfecting the consumer experience as we talked about the last couple of quarters. We're sitting in Plano and surrounding markets. We're focused on making sure we can really prove product market fit. So no significant update from where we were last.

Speaker 2

I would say that consumer propensity to put their arms in the marketplace remains really high. Around 2 thirds of people say yes. So give me a cash offer from Opendoor and then give us some amount of time to come back to you and see if you can better that with an offer from Whether that's an institution or another buyer we're aware of in the market. So we're encouraged by some of the early signs we see, but I would just caution it's still early. The end here remains small, but we continue to be optimistic about the long term prospects for exclusives and for The continued evolution of our business to be more capital light and serve more home sellers over time.

Operator

Thank you. Our next question comes from the line of Yigal Arunyan with Citigroup. Your line is now open.

Speaker 6

Hey, good afternoon, guys. I want to follow-up on Chad's question actually On the exclusive piece,

Speaker 7

I mean, it doesn't sound like the strategy is changing around being a little bit more capital. It does feel like it's being pushed out or rolled out a little bit more slowly. Is Is

Speaker 6

that a fair characterization? I think we were kind of

Speaker 7

targeting in those markets being at 30% by the end of the year, if I remember correctly. And I think we're still waived off from that. So maybe just help us kind of like bridge from where we are today to where you want the goals to be? Thanks.

Speaker 2

Sure. I'm happy to address that. So what we said is in the markets in which we have exclusives, we want to be at 30% of our volumes In those markets running through the marketplace. We actually hit that last quarter. But as the market waxes and wanes, right, So will our volumes too.

Speaker 2

So we I think this is more for us right now about again, affecting the consumer experience and being displayed to what the actual percentage of volumes are tracking to. But we're still focused on meeting those metrics by the end of the year for Q3. We'll see how it plays out.

Speaker 7

Okay. That's helpful. And then

Speaker 6

On the inventory acquisition strategy, reducing the spreads later in the year,

Speaker 7

Maybe kind of similarly on a bridge to 2024 and as we think about like scaling back to where You guys have been historically, before we kind of slow things down here, and what's proving to be is still Low inventory environment, a lot of reluctancy from homeowners to sell still, which can kind of drag on Can you just expand on the strategy To purchase more, do you think about what level of spread you might need to entice people more to get out of their homes? I know there's always going to be a certain amount of people that need to move and your product delivers a lot of value for that. But if we're Getting back to real revenue growth next year and starting to scale the business back up, I feel like inventory levels and people's willingness to move needs To go up or you have to kind of push the needle for people a little bit, if that makes sense. Thanks.

Speaker 6

Yes, absolutely. One On the sort of macro layer of that question, then we can move on from there. I think when we think about what stability in the housing market looks like, We need stable home pricing, so we can reduce our spreads. And so if you look at where we sit today, there's just a much wider distribution of outcomes, Which we have reflected in higher spreads. And so it's that pricing stability, which really will allow us to reduce our spreads.

Speaker 6

We do not need market volumes to fully recover. If you kind of zoom out for a minute, we're talking about a $2,000,000,000,000 market with our TAM being $650,000,000,000 So we need a slightly bigger slice of a very big market despite the lower volumes that we're in today. So what we're focused on is what we can control. We can reduce spreads through improving our cost structure, which improves conversion and unlocks marketing spend. We're focused on deepening our partnership channels, which are long term growth So really all of those actions we're taking drive incremental acquisition volumes and will allow us to reaccelerate those volumes as we've discussed in 2024.

Speaker 6

Got it. Thanks so much.

Operator

Thank you. Our next question comes from the line of Nick Jones with JMP Securities. Your line is now open.

Speaker 8

Great. Thanks for I guess just first with kind of the success you're having acquiring through partnership channels, Is it fair to assume there's maybe some wiggle room to continue to take sales, marketing and operations costs down as you maybe pull back your own kind of Direct to consumer spend. And then on top of that, through those channels, is Opendoor able to build kind of strong brand awareness? Or does the kind of Partner brands supersede your ability to kind of generate brand through those channels.

Speaker 2

Hey, Nick, it's Carrie. You would imagine that a fixed CAC channels continue to grow potentially and outstrip sort of the direct to consumer channels that we may be driving with paid marketing, We should be able to leverage our overall marketing costs over time. We want to make cost effective paid marketing investments so long as our That's another driver of volumes, but we're not going to invest those dollars if it's not high return. So We'll see how it evolves over time, but our long term objective for sure is to continue to leverage our marketing spend. And we've been able to do that as we've grown in scale, We've learned awareness.

Speaker 2

We've been able to market nationally. And one of the things we called out in our most recent shareholder letter is that as we reduced our pay spend, we have leaned into We think it's been some pretty good creative around the brand side. And even though we've taken marketing expenses up 80%, brand awareness for us has been sustained Static, which is great. It's a testament, I think, to just what we're customers are continuing to know about, starting to know about Opendoor and come to us organically. So

Speaker 8

Great. And then any comments on the kind of 2024 objectives? Is there any change in Kind of cadence or timing, just some of the positive adjusted EBITDA, net income and $10,000,000,000 annualized run rate, are those kind of Coal is still intact.

Speaker 3

Yes, this is Kristine here. Happy to take that question. We absolutely remain committed To returning to ANI breakeven point next year and assuming some level of market stabilization that would come at a steady state of $10,000,000,000 annualized revenue. It requires us to take volumes from where they are today to $2,200,000 which Carrie talked to a little bit earlier. And we absolutely believe that we have the balance sheet, the fixed rate capital structure and the cost structure to return there.

Speaker 8

Great. Thanks for taking the questions.

Operator

Thank you. Our next question comes from the line of Ryan Tomasello with KBW. Your line is now open.

Speaker 9

Hi, everyone. Thanks for taking the questions. Just unpacking the OpEx commentary a bit further here. Is the $100,000,000 quarterly run rate Enough to support the $10,000,000,000 breakeven target. Just trying to understand how we should think about any investment needs, Balancing the efficiencies you're getting on the partnership side and making sure models are rational here.

Speaker 9

Thanks.

Speaker 3

Hi, Ryan. Thanks for the question. It's Christie. And yes, the $10,000,000 breakeven target, there's 3 basic components. There's the contribution margin target, The adjusted OpEx and interest expense, for breakeven, we need to be at the higher end of our increased contribution margin target range of 5% to 7%.

Speaker 3

We expect to be in 4% to 5% for adjusted OpEx and 2% to 3% for interest expense.

Speaker 9

Okay. That's really helpful. And then I guess just more of a nuanced question in terms of acquisition funnels. Curious if you're seeing any uptick in the amount of homes you're buying From the institutional side like SFR rates or even the short term rental players given that those platforms seem to be calling their portfolios there. Is that an attractive way to kind of supplement the acquisition pipeline here?

Speaker 6

So obviously, we've been engaged with those partners for our entire existence. So we're very close to all of them. I certainly can't comment on specific individual partners, but I do think we are a use in the same way that we're Useful for consumers to provide that simplicity and certainty, we can do the same thing for institutions. So we are actively talking to them both about their Disposition strategies and their acquisition strategies, because obviously that we can help solve for both of those.

Speaker 9

Okay. Thanks for taking the questions.

Speaker 6

Yes. And I do think just to add on one more point there, I think the if you look at aggregate industry volumes for single front rental, those are obviously down quite a bit. And so that they are sort of being more patient with deployment of capital certainly versus where they were last year. But we're positioned well to capitalize on any increases as well as any sort of turnover they do natural turnover they do in their portfolio.

Operator

Thank you. Our next question comes from the line of Curtis Nagle with Bank of America. Your line is now open.

Speaker 10

Good afternoon and thanks for taking the question. Maybe just changing the topic just a little bit. Curious if you guys could go back into the market It's clear to Converge. I think you've done a couple of deals now where you bought it, pretty nice discounts. I don't think the Bonds are at lows, but still at a pretty nice discount to principal.

Speaker 10

So Yes, just curious what you're thinking from a capital allocation, that standpoint, or are we going to be reserving capital for An acceleration of inventory into next year.

Speaker 6

Yes. So obviously, we did Due to those over the course of the year and have basically taken that principal down by almost half, as Christy alluded to earlier. Happy with the execution, happy with the pricing, happy with the equity change there. If you sort of look at our shareholders' equity, that's actually up in the last quarter by 50,000,000 I think going forward, we don't comment on future transactions of that sort. I think the balancing act for us always is have the right amount of And so very comfortable with the capital position we're in today, But I won't comment on future transactions.

Speaker 10

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Ryan McKeveny with Zelman and Associates. Your line is now open.

Speaker 11

Hi there. Thanks for taking the question. This might be for Dowd on contribution margins. So on the new book homes that were sold this Quarter 10.5 percent Centimeters up from 8.5% last quarter. So I guess first question is just on that step up Should we think of that as mostly a function of, the increase in HPA generally that we've Kind of seen this year and then hoping you can maybe connect the guidance for getting to the 5% to 7% Centimeters by 4Q.

Speaker 11

You obviously on an overall basis that will be good to get back to you. But I guess maybe just help sort of bridge where you're at on that new book margin today and What's the path from there to the 5 to 7, assuming we also on new book homes mostly In the Q4, whether it's pricing, seasonality, spread dynamics, just kind of curious if you can help connect those dots a bit? Thank you.

Speaker 6

Yes. I'll start and then Chris, you can jump in on the Q4 piece. So if you sort of look back at the first half of this year And look at market volumes, they were actually past where they were in 2014 to 2019. So it was a very tight supply, and it was paired with Strong consumer demand to buy homes. And so that resulted in home prices outperforming our expectations.

Speaker 6

That plus the cost reductions we've executed Allowed us to reduce spreads, which to your question resulted in both margin outperformance and as we highlighted, plus 53% growth quarter over quarter In the Q2, if you look forward to the second half of this year, we do still expect to see obviously negative month over month home price changes, which are baked into our current spreads. This goes back to the point I made earlier about there just being a much wider distribution of outcomes around home prices Right now, given the current market conditions, as we talked about earlier, we do expect to reduce spreads in the 4th quarter, Given both incremental cost savings and home price seasonality, which leads to increased conversion, allows us to re rent paid marketing and will reaccelerate Volumes in the Q1. So I think that's the sort of macro overlay. Hopefully that connects those thoughts. And then Christy, if you want to tackle the margin piece, the margin progression.

Speaker 3

Yes. Hi, Ryan. It's Christie here. So the margin progression from Q3 to Q4, keep in mind that in Q3, About 1% of that 99% of the Q2 offer cohort is in contract. So those homes will close in Q3, plus we still have 1 more percent to sell.

Speaker 3

So there's a bit of drag in Q3 from the old book. In Q4, that is mostly gone and that is why we expect to be in our targeted range of 5% to 7% by Q4.

Speaker 11

Got it. That makes sense. Thank you. And Carrie, You made a comment and generally over time you've talked about like there's periods in the year that are kind of headwinds versus tailwinds. And I think you mentioned that as you get to 4Q, Things shift from headwind to tailwind.

Speaker 11

Is that commentary just sort of alluding to the seasonality of pricing, like if you're buying homes in the 4th quarter, Presumably, their homes you might be selling in kind of 1Q, 2Q next year when generally pricing is a bit stronger. Just curious if you Yes. Sorry, go ahead, Carrie.

Speaker 2

Yes. You're right. That's exactly it. I mean, that's seasonality in a nutshell. Prices tend to be softer in the second half, stronger in the first half.

Speaker 2

Market volumes tend to follow that same pattern. And so we would look to reduce our spreads in Q4 in anticipation of, Again, seasonal tailwinds on pricing moving into the Q1 next year, market volumes picking up also in the Q1 next year and selling into that strong First half of twenty twenty four. And that's a rhythm we're super familiar with. We manage seasonality every single year. So It's been it's quite consistent.

Speaker 11

Yes, absolutely. Okay, awesome. Thank you so much.

Operator

Thank you. This concludes the question and answer session.

Speaker 2

I will now hand the call

Operator

back over to Carrie Wheeler for closing remarks.

Speaker 2

Thanks very much. I just want to say, thanks for joining us today. As the hope comes across, we really focus this year on What we can control and we've made substantial progress in stabilizing the business and really using this time to make improvements that we think will yield benefits for years to come. Thank you for your support to our shareholders and thanks to the Opendoor team for their continued hard work and dedication. And we will talk to you next quarter.

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