Opendoor Technologies - Q2 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Opendoor Second Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Whitney Kukulka, Investor Relations with The Blueshirt Group. Please go ahead.

Whitney Kukulka (Managing Director)

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 investor.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 law. All statements other than statements of historical fact are statements that could be deemed forward-looking, including, but not limited to, 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-K for the year ended December 31, 2022, as updated by our periodic reports filed after that 10-K. 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. The company believes these non-GAAP financial measures are useful to investors as supplemental operational measurements to evaluate the company's financial performance.

For a reconciliation of each of 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 Carrie Wheeler, Chief Executive Officer of Opendoor.

Carrie Wheeler (CEO)

Good afternoon. Also on the call with me today is Christy Schwartz, our Interim Chief Financial Officer, and Dod Fraser, President of Capital and Open Exchange. Opendoor's vision is to build the most trusted e-commerce platform for residential real estate, where home buyers 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 first 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. 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. 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 and higher customer acquisition costs in our direct-to-consumer paid marketing channels. We've leaned into our partnerships with home builders, 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. 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. 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, will 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.... 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. 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. With that, I'm going to turn the call over to Christy to review guidance and financial results.

Christy Schwartz (Interim CFO)

Thank you, Carrie. Our second quarter results reflect progress in selling through our longest-held homes while continuing to build into a new book of inventory. We remain focused on delivering healthy, risk-adjusted contribution margins and preserving capital through disciplined cost management. We delivered $2 billion of revenue in the second 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 and 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.

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 first quarter of 2023, and continued to decline to 31% year-over-year in the second quarter. We reduced the average spread offered between the first and second quarter of 2023 to reflect 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 of 2023.

Our Q2 contribution margin was -4.6% versus positive 10.1% in Q2 of 2022, and -7.7% in Q1 of 2023. 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 second quarter. We expect this group of homes to perform in line with our revised contribution margin target of 5%-7% once fully sold through. We expect contribution margin to return to positive in the third quarter when the new book of inventory composes a majority of resales.

Adjusted EBITDA loss was $168 million in the second quarter, inclusive of our previously recorded inventory valuation adjustments of $-156 million. This beat the high end of our guidance range of an adjusted EBITDA loss of $180 million, is an improvement from an adjusted EBITDA loss of $341 million in Q1 of 2023. Adjusted operating expenses, which we define as the delta between contribution margin and adjusted EBITDA, was $78 million in Q2, down from $100 million in Q1 of 2023, and $204 million 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 million in the third quarter of 2023.

The sequential increase from the second to third quarter reflects our expectation to begin rebuilding inventory at a modest pace in the third quarter. Turning to our balance sheet, we ended the second quarter with $1.1 billion in total shareholders' equity, which is an increase of $50 million from the first quarter of 2023. 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 50%, from $978 million-$510 million.

We ended the second quarter with $1.6 billion in total capital, which includes $1.2 billion in unrestricted cash, cash equivalents, and marketable securities, and $269 million of equity invested in homes and related assets, net of inventory valuation adjustments. At quarter end, we had $10.1 billion in non-recourse asset-backed borrowing capacity, comprised of $5.4 billion of senior revolving credit facilities and $4.7 billion of senior and mezzanine term debt facilities, of which total committed borrowing capacity was $4.3 billion. During the quarter, we wound down the last of our two dedicated Q2 offer cohort financing facilities, given the substantial progress we've made in selling through these homes.

Turning to guidance, we expect third quarter revenue to be between $950 million and $1 billion, and adjusted EBITDA loss to be between $60 million and $70 million. We expect the second 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. We expect to perform within our 5%-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 billion, or approximately 2,200 acquisitions and resales per month at our target contribution margin range of 5%-7%. While the overall state of 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 2023, 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 is 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 ANI breakeven inflection point will be impacted by the pace at which we lean into growth.

If our acquisition pace exceeds our resale pace, we would recognize certain acquisition and inventory holding costs, such as marketing, financing, and variable SG&A costs, before realizing the corresponding revenue. The second half of 2023 will showcase our continued investments in our pricing and operations platforms, durable growth levers, and improving our overall cost structure via efficiency and automation. 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&A.

Operator (participant)

Thank you. As a reminder, to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. We ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Dae Lee with JPMorgan. Your line is now open.

Dae Lee (VP of Equity Research)

Great. Thanks for taking the questions. I have two. First one on the partnership. Sounds like it's a pretty core component to your second half expectations and growth into 2024, and it looks like the mix grew from about 1/3 last quarter to 40% this quarter. Could you help us unpack what drove that, drove that growth? How-- and as you look ahead, like, how should we think about the mix of partnership as an overall volume perspective? Secondly, on your adjusted OpEx stepping on quarter-over-quarter, I think you talked about growing your inventory in 3Q as the main driver. Can you help us understand, like, what incremental costs are actually going into that?

Is it more about brand spend, or do you need more head count to drive more inventory? Thank you.

Carrie Wheeler (CEO)

Hey, Dae, it's Carrie. I'm happy to take the partnership question. I'll hand over to Christy. She can talk about adjusted OpEx. I missed you a little bit on that first question. I think I got the gist of it. If I missed something, just please, please jump in. On the partnership side, for us, just as a reminder, partnerships include home builders, includes agents, and includes the online real estate platforms. For us, it's Zillow, Realtor.com, and Redfin. We like these channels for a variety of reasons, one of them being that they are fixed from a customer acquisition cost standpoint. They are agnostic to spread and durable kind of in all environments. 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. They grew almost 80% in total quarter-over-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 with the home builders for a long time. That's a great channel for us. That is a trade-in customer, which is a natural use of the Opendoor product. Agents, also, a group that we've been working with for a long time, but as we, we moved into an elevated spread environment, we've really recognized the power of that partnership with agents and have leaned into that channel and driven the incremental growth from them over the last year plus. We continue to expect to do so.

Then the last part of that is online real estate, which for us is the most nascent of the three. We are, you know, just ramping really the Zillow relationship, for example, five to 25 markets in the last quarter, and that's just starting to grow really nicely. Probably in that order in terms of growth, without getting into specifics as to actual mix. Christy, do you want to talk about the OpEx piece?

Christy Schwartz (Interim CFO)

Yes, absolutely. I'll start by saying that we're still very focused on optimizing costs, and we are making progress throughout the P&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 second 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. Conversely, when inventory is contracting, as it did in Q2, 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 third quarter, we expect $100 million per quarter to be an appropriate estimate.

Dae Lee (VP of Equity Research)

All right. Thank you.

Operator (participant)

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

Chad Larkin (Director of Equity Research)

Hey, thanks. This is Chad on for Jason. I, 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, you know, the bad cohort gone and the housing market, you know, seemingly bottomed? I have one more. Thanks.

Carrie Wheeler (CEO)

Hey, it's Carrie. Let me talk a little bit about that. Normalized growth, right? Interesting 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, what we expect to be seeing for the back half of this year is a pretty steady pace at around 1,000 acquisitions per month or 3,000 homes per quarter. 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'll allow us to drive more volume. It'll allow us to increase our paid marketing spend in a more efficient way, and obviously, we'll continue to lean into the partnership channels we've been talking about.

Those will continue to grow, and that'll drive more volume into next year. That's really the near term growth outlook. The next marker for us is to double volume, that's what we're marching to for the middle of next year, to be back to kind of that steady state, breakeven, adjusted net income target we have, 1,000-2,200 contracts for acquisition.

Chad Larkin (Director of Equity Research)

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

Carrie Wheeler (CEO)

Yeah, we, we're continuing to focus on perfecting the consumer experience, as we've 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. No significant update from where we were last. I would say that, you know, consumer propensity to put their homes in the marketplace remains really high. Around 2/3 of people say yes. Give me a cash offer from Opendoor, and then give us some amount of time to come back to you and see if we can better that with an offer from whether that's an institution or another buyer we're aware of in the market. We're encouraged by some of the early signs we see, but I would just caution it's still early.

The N here remains small, but we continue to be optimistic about the long-term prospects for Exclusives and for the, you know, the continued evolution of our business to be more capital light and serve more home sellers over time.

Operator (participant)

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

Ygal Arounian (Director of Internet Equity Research)

Hey, good afternoon, guys. I, I wanna follow up on Chad's question, actually, on the exclusive piece. 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, a pushed out or, or rolled out a little bit more, more slowly. Is that a fair characterization? I, I think we were kind of targeting, in those markets being at 30% by the end, end of the year, if I remember correctly, and I think we're, we're still ways off from that. Maybe just help, help us kind of like bridge from where we are today to where, you know, where, where, where you want the, the goals to be. Thanks.

Carrie Wheeler (CEO)

Sure, I'm happy to address that. What we said is, in the markets in which we have exclusives, we will wanna be at 30% of our volumes in those markets running through the marketplace. We actually hit that last quarter. Listen, as the market waxes and wanes, like, so will our volumes too. I, I think this is more for us right now about, again, perfecting the consumer experience and being a slave to what, what the actual percentage of volumes are tracking to. We're still focused on meeting those metrics by the end of the year for exclusives. We'll, we'll see how it plays out.

Ygal Arounian (Director of Internet Equity Research)

Okay, that's helpful. Then, on, on the inventory acquisition strategy, you know, reducing the spreads later in the year, maybe kind of similarly on, on, on a bridge to 2024, and as we think about, like, scaling back to where you know, you guys have been historically, before we kind of slowed things down here. You know, what's, you know, proving to be a still low inventory environment, a lot of reluctancy from homeowners to sell still, you know, which can kind of drag on from here. Can you just expand on, on the strategy to, to, to purchase more? You know, do you think about what level of spread you might need to entice people more, you know, to get out of their homes?

I, I, I know there's always gonna be a certain amount of people that, that, that need to move, and, and your product delivers a lot of value for that. You know, but if we're getting back to, to real revenue growth next year and starting to scale the business back up, you know, I feel like inventory levels and people's willingness to move needs to go up or, or, or you have to kind of push, push the needle for people a little bit, if that makes sense? Thanks.

Dod Fraser (President of Capital and Open Exchange)

Yeah, happy to. One more on, on the, the sort of macro layer of that question, then we can move on from there.

When we think about what stability in the housing market looks like, we need stable home pricing so we can reduce our spreads. If you look at where we sit today, there's just a much wider distribution of outcomes, which we have reflected in higher spreads. It's that pricing stability, which really will allow us to reduce our spreads. We do not need market volumes to fully recover. If you kind of zoom out for a minute, we're talking about a $2 trillion market with our TAM being $650 billion. We need a slightly bigger slice of a very big market despite the lower volumes that we're in today. 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 drivers. 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.

Ygal Arounian (Director of Internet Equity Research)

Got it. Thanks so much.

Dod Fraser (President of Capital and Open Exchange)

Sure.

Operator (participant)

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

Nick Jones (Managing Director of Internet Equity Research)

Great. Thanks for taking the questions. I guess just first, with kind of the, 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? Then on top of that, through those channels, is Opendoor able to build kind of strong brand awareness, or does the kind of partner brand supersede your ability to kind of generate brand through those channels?

Carrie Wheeler (CEO)

Hey, Nick, it's Carrie. You would imagine that as fixed CAC channels continue to grow potentially and outstrip some 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 spreads allow us to do so, right? That's another driver of volumes. We're not going to, you know, invest those dollars if it's not, you know, high return. We'll see how it evolves over time. You know, our long-term objective, for sure, is to continue to leverage our marketing spend. We've been able to do that as we've grown in scale, we've grown in awareness, we've been able to market nationally.

One of the things we called out in our most recent shareholder letter is that as we've reduced our paid spend, we have leaned into what we think has been some pretty good creative around the brand side. You know, even though we've taken marketing expenses down 80%, you know, brand awareness for us has been sustained, static, which is great. It's a testament, I think, to just what we're-- you know, customers are continuing to know about-- starting to know about Opendoor and come to us more organically. More to come.

Nick Jones (Managing Director of Internet Equity Research)

Great. Then any comments on the kind of 2024 objectives? Is there any change in kind of cadence or timing to some of the positive adjusted EBITDA net income and $10 billion annualized run rate? Are those kind of goals still intact?

Christy Schwartz (Interim CFO)

Yeah, this is Christy here. Happy to take that question. We absolutely remain committed to returning to ANI breakeven point next year. Assuming some level of market stabilization, that would come at a steady state of $10 billion annualized revenue. It requires us to take volumes from where they are today to 2,200, 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.

Nick Jones (Managing Director of Internet Equity Research)

Great. Thanks for taking the question.

Operator (participant)

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

Ryan Tomasello (Managing Director)

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

Christy Schwartz (Interim CFO)

Hi, Ryan. Thanks for the question. It's Christy. Yeah, the $10 billion breakeven target, there's three 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%-7%. We expect to be in 4%-5% for adjusted OpEx and 2%-3% for interest expense.

Ryan Tomasello (Managing Director)

Okay, that, that's really helpful. I guess just more of a, 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 culling their portfolios there. You know, is, is that, is that an attractive way to kind of supplement the acquisition pipeline here?

Dod Fraser (President of Capital and Open Exchange)

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 in the same way that we're useful for consumers to provide that simplicity and certainty, we can do the same thing for institutions. We are actively talking to them both about their disposition strategies and their acquisition strategies, because obviously we, we can help solve for both of those.

Ryan Tomasello (Managing Director)

Okay, thanks for taking the questions.

Dod Fraser (President of Capital and Open Exchange)

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

Operator (participant)

Thank you. As a reminder, to ask a question at this time, please press star one one on your touchtone telephone. Our next question comes from the line of Curtis Nagle with Bank of America. Your line is now open.

Curtis Nagle (Director and Senior US Business & Information Services Equity Analyst)

Good afternoon, thanks for taking the question. Maybe just changing the topic just a little bit. Curious if you guys could go back into the market to pay the converts. I think you've, you've done a couple of deals now where, you know, you bought it pretty nice discounts. I don't think the bonds are at lows, you know, still at a pretty nice discount to principal. Yeah, just curious what you're thinking from a capital allocation from that standpoint. You know, are we going to be reserving capital for an acceleration of inventory into next year?

Dod Fraser (President of Capital and Open Exchange)

Yep. Obviously we, we did do two of those over the course of the year and have basically taken that principal on 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 actually up in the last quarter by $50 million. 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 liquidity and capital in the system for us to weather all scenarios. Very comfortable with the capital position we're in today. Won't comment on future transactions.

Curtis Nagle (Director and Senior US Business & Information Services Equity Analyst)

Okay, thanks.

Operator (participant)

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

Ryan McKeveny (Managing Director)

Hi there, thanks for taking the question. This might be for Dod on contribution margins. On the new book homes that were sold this quarter, 10.5% CM, up from 8.5% last quarter. I guess first question is just on that, on that step up sequentially. Should we think of that as mostly a function of the increase in HPA generally that we've kind of seen this year? Then hoping you can maybe connect the guidance for getting to the 5%-7% CM by 4Q. Obviously, on an overall basis, that'll be good to get back to.

I guess maybe just help sort of bridge, you know, where you're at on that new book margin today, and, you know, what's the path from there, you know, to the 5%-7%, assumingly also on quote, unquote, "new book homes," mostly, in the fourth quarter, whether it's pricing, seasonality, spread dynamics. Just, just kind of curious if you can help connect those dots a bit. Thank you.

Dod Fraser (President of Capital and Open Exchange)

Yeah, I'll start, then, and then, Christy, you can jump in on the, on the fourth quarter piece. If you sort of look back at the first half of this year, and look at market volumes, they were actually half where they were in 2014-2019. It was a very tight supply, and with pair, strong consumer demand to buy homes. That resulted in home prices outperforming our expectations. 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, +53% growth quarter-over-quarter in the second quarter.

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 fourth quarter, given both incremental cost savings and home price seasonality, which leads to increased conversion, allows us to re-ramp paid marketing and will re-accelerate volumes at a first quarter. I think that's the sort of macro-overlay. Hopefully, that connects those dots. Christy, if you want to tackle the margin piece, the margin progression.

Christy Schwartz (Interim CFO)

Yeah. Hi, Ryan. It's Christy here. 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 to sell. 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%-7% by Q4.

Ryan McKeveny (Managing Director)

Got it. That makes sense. Thank you. 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. I think you mentioned that as you get to 4Q, things shift from headwind to tailwind. Is that commentary just sort of alluding to the seasonality of pricing? Like, if you're buying homes in the fourth quarter, presumably they're homes you might be selling in kind of 1Q, 2Q next year, when generally pricing is, is a bit stronger.

Carrie Wheeler (CEO)

You got it.

Ryan McKeveny (Managing Director)

Curious if you... Yeah, sorry, go ahead, Carrie.

Carrie Wheeler (CEO)

Yeah, you go. Sorry. That's exactly it. I mean, that's, that's seasonality in a nutshell. You know, prices tend to be softer in the second half, stronger in the first half. Market volumes tend to follow that same pattern. So we would look to reduce our spreads into Q4 in anticipation of, again, seasonal tailwinds on pricing moving into the first quarter next year, market volumes picking up also in the first quarter next year and selling into that strong first half of 2024. That's a rhythm we're super familiar with.

Ryan McKeveny (Managing Director)

Okay.

Carrie Wheeler (CEO)

We manage seasonality every single year, so it's quite consistent.

Ryan McKeveny (Managing Director)

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

Operator (participant)

Thank you. This concludes the question-and-answer session. I will now hand the call back over to Carrie Wheeler for closing remarks.

Carrie Wheeler (CEO)

Thanks very much. I just want to say, thanks for joining us today. As I hope comes across, we really focused 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. We will talk to you next quarter.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.