The Federal Reserve is likely to raise interest rates by at least a quarter point on the Fed Funds rate when it meets on May 2-3. With the economy showing increases signs of weakness, another rate increase could trigger a recession.
The situation is starting to gather steam ahead of the Fed's rate hike as another home flipper, Arizona based Opendoor (OPEN) is reducing its workforce by 22%.
First here is a summary of economic data released on 4/20/23:
U.S. leading economic indicators fell 1.2% in March compared to February; the 12th straight decline. There were weak signs across the board, notably; stock prices, falling consumer expectations, and signs that credit is tightening;
Existing Home sales cratered after a lower mortgage rate boost in February. Year over year, existing home sales have fallen 22%;
The Philadelphia Fed Business Survey fell for the eight straight month (10 out of the last 11 months).
Combined the data paint a picture of a steadily weakening economy.
Can Opendoor Remain Open Much Longer?
AI fueled home flipper Opendoor Technologies (OPEN) is laying off 22% of its workforce, 560 employees as losses mount. This follows another 560 employees laid off in late 2022.
Opendoor is facing the same problems which struck Zillow (Z) and Redfin (RDFN) as their AI pricing models led the companies to overpay for houses which required more remodeling than normal. This led to the companies overpaying in expectations that low interest rates would last forever.
When the Fed started raising rates and existing home sales cratered, the party was over. Zillow and Redfin were able to restructure more effectively and are likely to survive.
Opendoor, on the other hand is trading just above $1 per share and is facing big problems. And although it has reported five straight quarterly income losses, it does have over $1.2 billion on its balance sheet, which could keep them afloat for awhile. Unfortunately, they have over $5 billion in debt.
Opendoor's fate is not quite as dire as co-working firm We Work (WE) who only has $287 million of cash on its balance sheet to go along with its nearly $18 billion in debt. I'll have more on We Work in this week's Market Summary at Joe Duarte in the Money Options.com. You can take a Free Trial subscription to the service or just sign up for a FREE weekly emailed Market Summary.
You can see the similar trajectory in both stocks, although clearly We Work's problems seem to be much worse. The New York Stock Exchange is threatening to delist the company and land lord lawsuits are piling up.
Meanwhile, the U.S. Ten Year Note yield (TNX) continues to hover around the 3.5% area as bond traders wrestle with inflation while also betting on the notion that one or two more rate hikes from the Fed are likely to push the U.S. economy into recession.
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