Home-Buying Companies Stuck With Hundreds of Houses as Demand Slows
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Home-Buying Companies Stuck With Hundreds of Houses as Demand Slows

As mortgage rates surged, some customers backed out of purchases or needed more time for financing

By WILL PARKER
Wed, Feb 8, 2023 9:03amGrey Clock 3 min

Ribbon Home Inc. had a fast-growing business during the housing boom. The New York City-based startup purchased homes with cash on behalf of buyers. Then it sold the homes to the buyers at the same price, plus a fee, once the buyers got a mortgage.

This approach made their clients’ offers more appealing, since sellers often prefer all-cash transactions that can close quickly and are considered more reliable. Ribbon has been active in hot markets such as Atlanta and Charlotte.

But last year as mortgage rates surged, some Ribbon customers backed out of their purchases or needed more time to get financing. That left the company owning nearly 400 homes, according to property records analysed by research firm Attom Data Solutions and confirmed by the company.

Ribbon is one of a handful of young companies known as power buyers. These firms created a niche business around helping home buyers gain an edge during the hyper competitive housing boom. Now that the market has cooled, some of these companies are stuck with hundreds of homes they acquired on behalf of clients.

Orchard Technologies Inc., another power buyer that has been active in places such as Denver and Dallas, helps customers buy a new home and move before selling their previous home. If clients can’t sell their homes after four months, Orchard agrees to buy them.

The company now owns about 200 homes its customers were unable to sell, said its Chief Executive Court Cunningham. Mr. Cunningham said Orchard has had to buy homes from customers three times as frequently over the past six months.

The unanticipated glut of homes these firms are carrying is an example of how housing-oriented companies that thrived when mortgage rates were super low are struggling to survive in a higher rate environment.

Online home-flipping companies also experienced turbulence as rates surged. Opendoor Technologies Inc. last year slashed prices on thousands of homes it purchased near the height of the market. The company reported huge losses and laid off 18% of its workforce.

Ribbon has let go of about 170 employees, or 85% of its staff, but it still needs to unload its surplus of houses. About half of those homes Ribbon will try to sell on the open market because their customers didn’t follow through on their purchases. People backed out because they didn’t want to sell their current homes in a down market, had credit issues or had a life event that changed their plans, said Shaival Shah, Ribbon’s chief executive.

The other half the company hopes to sell to the original customers. Most of those customers are renting from Ribbon, and some have asked for more time to obtain financing, Mr. Shah said.

Some power buyers say they are optimistic the housing market can stabilise, and recently there have been a few signs that buying may be picking up.

Power buyers say that their business will continue to serve home buyers in competitive markets and help even the playing field with investors, who often purchase homes with cash. Meanwhile, many are focused on improving products aimed at prospective sellers who are nervous to list their homes in a slow market.

“There was sort of a power shift, from the power sitting with the seller knowing that their home is going to sell within a day, to the power sitting with the buyer,” said Tim Heyl, founder of the Austin-based power buyer Homeward Inc.

Ribbon, which halted its cash-buyer program last year, said it is developing new products before it restarts. HomeLight Inc., another power buyer, recently changed up one of its main offerings so that it wouldn’t buy as many homes moving forward, said Drew Uher, the company’s chief executive.

Mr. Cunningham, of Orchard, said his company has reduced losses from homes it acquired by charging customers fees on both the sale of their previous homes and the purchase of their new homes. He said seller demand for backup offers from Orchard is rising given ongoing uncertainty about home sales.

Some executives said they don’t expect every power buyer to survive. Many relied on venture capital to grow during the height of the housing market, but they are unlikely to raise as much money now. Between January and late November 2022, venture investment in proptech companies decreased 21% compared with the same period the year prior, according to a report from Keefe, Bruyette and Woods Inc.

“People were doing all sorts of things to outbid or be the most competitive offer,” said Diane Vanna, a real-estate agent at Baird & Warner in Chicago, who in 2021 represented a buyer who won a bidding war against 36 other offers. “Now it’s really levelled off.”



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How much income is required to service a mortgage? It depends on where you live

New research suggests spending 40 percent of household income on loan repayments is the new normal

By Bronwyn Allen
Thu, Apr 25, 2024 3 min

Requiring more than 30 percent of household income to service a home loan has long been considered the benchmark for ‘housing stress’. Yet research shows it is becoming the new normal. The 2024 ANZ CoreLogic Housing Affordability Report reveals home loans on only 17 percent of homes are ‘serviceable’ if serviceability is limited to 30 percent of the median national household income.

Based on 40 percent of household income, just 37 percent of properties would be serviceable on a mortgage covering 80 percent of the purchase price. ANZ CoreLogic suggest 40 may be the new 30 when it comes to home loan serviceability. “Looking ahead, there is little prospect for the mortgage serviceability indicator to move back into the 30 percent range any time soon,” says the report.

“This is because the cash rate is not expected to be cut until late 2024, and home values have continued to rise, even amid relatively high interest rate settings.” ANZ CoreLogic estimate that home loan rates would have to fall to about 4.7 percent to bring serviceability under 40 percent.

CoreLogic has broken down the actual household income required to service a home loan on a 6.27 percent interest rate for an 80 percent loan based on current median house and unit values in each capital city. As expected, affordability is worst in the most expensive property market, Sydney.

Sydney

Sydney’s median house price is $1,414,229 and the median unit price is $839,344.

Based on 40 percent serviceability, households need a total income of $211,456 to afford a home loan for a house and $125,499 for a unit. The city’s actual median household income is $120,554.

Melbourne

Melbourne’s median house price is $935,049 and the median apartment price is $612,906.

Based on 40 percent serviceability, households need a total income of $139,809 to afford a home loan for a house and $91,642 for a unit. The city’s actual median household income is $110,324.

Brisbane

Brisbane’s median house price is $909,988 and the median unit price is $587,793.

Based on 40 percent serviceability, households need a total income of $136,062 to afford a home loan for a house and $87,887 for a unit. The city’s actual median household income is $107,243.

Adelaide

Adelaide’s median house price is $785,971 and the median apartment price is $504,799.

Based on 40 percent serviceability, households need a total income of $117,519 to afford a home loan for a house and $75,478 for a unit. The city’s actual median household income is $89,806.

Perth

Perth’s median house price is $735,276 and the median unit price is $495,360.

Based on 40 percent serviceability, households need a total income of $109,939 to afford a home loan for a house and $74,066 for a unit. The city’s actual median household income is $108,057.

Hobart

Hobart’s median house price is $692,951 and the median apartment price is $522,258.

Based on 40 percent serviceability, households need a total income of $103,610 to afford a home loan for a house and $78,088 for a unit. The city’s actual median household income is $89,515.

Darwin

Darwin’s median house price is $573,498 and the median unit price is $367,716.

Based on 40 percent serviceability, households need a total income of $85,750 to afford a home loan for a house and $54,981 for a unit. The city’s actual median household income is $126,193.

Canberra

Canberra’s median house price is $964,136 and the median apartment price is $585,057.

Based on 40 percent serviceability, households need a total income of $144,158 to afford a home loan for a house and $87,478 for a unit. The city’s actual median household income is $137,760.

 

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