Earnings Call Transcript - OPAD Q2 2023

Operator, Operator

Good afternoon. Thank you for attending the Offerpad Second Quarter 2023 Earnings Call. My name is Bethany, and I'll be the moderator for today's call. I'll now turn the call over to Stefanie Layton, Senior Vice President of Investor Relations and ESG at Offerpad. Stefanie?

Stefanie Layton, Senior Vice President of Investor Relations and ESG

Thank you, and good afternoon, everyone. Welcome to Offerpad Solutions Second Quarter 2023 Earnings Call. Our Chairman and Chief Executive Officer, Brian Bair; Chief Financial Officer, Jawad Ahsan; and Senior Vice President, Finance, James Grout, are here with me today. During the call today, management will make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain, and events could differ significantly from management's expectations. Please refer to the risks, uncertainties and other factors relating to the company's business described in our filings with the U.S. Securities and Exchange Commission. Except as required by applicable law, Offerpad does not intend to update or alter forward-looking statements, whether as a result of new information, future events or otherwise. On today's call, management will refer to certain non-GAAP financial measures. These metrics exclude certain items discussed in our earnings release under the heading non-GAAP financial measures. The reconciliations of Offerpad non-GAAP measures to the comparable GAAP measures are available in the financial tables of the second quarter earnings release on Offerpad's website. I'll now turn the call over to Brian.

Brian Bair, Chairman and Chief Executive Officer

Thanks, Stefanie. Hey, everyone, I appreciate you joining us. Today, I'll cover Q2 highlights, market trends and operational updates. Before we dig in, I would like to introduce Jawad Ahsan, our new Chief Financial Officer. Jawad is a highly regarded CFO with extensive experience in an accomplished career. He previously served as CFO at Axon and spent 13 years in various roles at GE, including serving as CFO for their health record and enterprise software businesses. I believe his strength and expertise will add significant value to Offerpad by helping drive profitable growth and improving our operational excellence. We are excited to have Jawad as part of our senior leadership team. Turning to our second quarter results. We beat our financial expectations across the board. Our homes sold revenue and adjusted EBITDA all exceeded the top end of our second quarter guidance ranges. This outperformance reflects the improvements we have made to our business processes and our elevated focus on profitability. Other highlights for the quarter include reporting our highest gross margin since quarter 3 2021 at 9.7%, achieving 9.5% contribution margin after interest per home sold on homes acquired after September 1, 2022, which is above our target range of 3% to 6% and surpassing 31,000 lifetime renovations. We emphasized last quarter that our plan to produce positive adjusted EBITDA by year-end is not dependent on market acceleration. We were prepared to perform through a period of depressed residential transaction volume, and that is exactly what we did in the second quarter. We remain confident in our ability to execute our 2023 plan. As we move into the second half of the year, the economy and housing market continue to show resilience. Despite mortgage rates reaching 7%, low supply continues to support stabilizing resale prices as buyers outnumber sellers in many markets. However, the elevated mortgage rates are also contributing to the lower transaction volume and adding to the affordability challenge for many potential homeowners. Our forecasted 2023 acquisition volume reflects our expectation that current market conditions will continue throughout the remainder of the year. Given our acquisition volume increased by 131% from quarter 1 to quarter 2, we have demonstrated our ability to increase our pace in this present environment. On the operations side, our renovation service is more important than ever. The average age of homes in our markets is over 30 years old. This plays to our strength of buying a home and adding value. Our ability to renovate is a key differentiator and competitive advantage. Our culture of continuous improvement has been a key driver supporting our ability to meet our goals this year. As an example, we recently made tech advances with our customer-facing app and enhancements in our ability to leverage forward-looking data in underwriting homes. Our commitment to providing a seamless real estate transaction experience for our customers is evident in the significant enhancements made to our mobile and online applications. We've incorporated upgraded features that deliver meaningful and relevant information to sellers, granting them full visibility from request to closing. New features will include video tutorials, seller push notifications, the ability to upload and sign documents and direct messaging with the seller's dedicated Offerpad team members, further providing transparency and control for our customers. Additionally, we expect these changes can help boost overall efficiency and reduce costs for Offerpad. We've also integrated new tools to incorporate forward-looking data to better predict market trends. The goal is to use this data to make more competitive offers on desirable properties and increase our acquisition volume. At the same time, we can reduce risk exposure by not pursuing homes that are likely to be low-performing properties. Upgrading our data-driven systems facilitates intelligent growth, but our experienced local real estate professionals remain critical to our success. We believe combining human and artificial intelligence is key to making the best decisions possible. While on the note of technology, I'm very excited about the tremendous potential to harness the power of artificial intelligence. Since the beginning, machine learning has added valuable insights, helping us become smarter with every home we buy. And now with the rapid advancements of AI, like NLP and computer vision, the possibilities are endless. From the way we find and communicate with likely customers, underwrite and price a home and sell our homes, there are amazing possibilities with AI. I'm enthusiastic about the potential for thoughtfully incorporating AI across our company's operations. With the right strategic integration, we can unlock incredible innovations that propel us forward. Coming back to the operational front, I want to provide an exciting update on our FLEX Sell program. As a reminder, the program gives customers even more flexibility. They can accept our instant cash offer or test the open market with an Offerpad agent while retaining the cash offer as a backup. Given the major shift in market conditions last year, we paused FLEX Sell. However, I'm thrilled to announce we plan to relaunch this program in all Offerpad markets in quarter 3. From the very beginning, our vision has evolved around being a comprehensive real estate solutions center for everyone. In addition to serving the needs of home buyers and sellers, our reach extends to business-to-business partners and real estate agents across the nation. Our Direct Plus program that connects investors with sellers continues to build as we onboard new investor partners. Our renovation team continues to expand its impact by renovating non-Offerpad single and multifamily homes. To further pursue our real estate solution center goals, we are committing even more resources to strengthen and expand our homebuilder alliance and agent partnership programs. With around 100 homebuilder brands, our homebuilder program provides customers with a cash offer on their current home and the flexibility to select a closing date. Homebuilders benefit as Offerpad removes the contingency hurdle with the current home. Additionally, our agent partnership program has proven to be a desirable offering, generating over 130,000 agent-initiated offer requests. This valuable lead generation channel for Offerpad is also a simple solution for home sellers while their agent receives a referral fee upon a successful close, a win for all. In conclusion, the achievement of surpassing our second quarter goals instills even greater confidence in the success of our 2023 strategy. Simply put, our product offerings are strong, led by our cash offer. More and more customers start their real estate journey with us first and have consistently rated us over 90% in customer satisfaction. With proven ability to scale even in a challenging macro environment and a commitment to continuous improvement, we are well prepared to seize the opportunity once again. As we evolve our processes and products, they become even more efficient and add increased value to our customers. We set out to change the way real estate transacts forever, and that's exactly what we are doing. I'll now turn the call over to Jawad.

Jawad Ahsan, Chief Financial Officer

Thanks, Brian. I'm very excited to be at Offerpad and work with this incredibly talented group of individuals. I'd also like to acknowledge Mike for helping make my transition a smooth one and for building a world-class finance team. I'm also excited to share our strong financial results this quarter. Our expectation that momentum will accelerate throughout 2023 is reflected in our top and bottom-line results. There are three things in particular that I wanted to highlight. First, the key leading indicators of our business model are trending in the right direction. Second, we've made substantial progress towards reaching profitability. And third, our balance sheet continues to strengthen. I'd like to start by highlighting the positive trends in our key leading indicators. We've reduced our inventory of homes aged greater than 180 days down to less than 2%, well below our previously stated target of 10%. Our acquisition of homes grew month-over-month in the quarter. Time to cash, or our holding period, reflected a 47-day sequential improvement at 138 days in Q2 compared to 185 days in Q1. In fact, for the month of June, time to cash was 94 days, solidly below our 100-day target. We expect holding times to continue to trend down this year and will likely remain below our 100-day average target in Q3, which lowers our holding costs and reduces our exposure to market volatility. Finally, we're seeing a marked improvement in the contribution margin for the cohort of homes acquired on or after September of 2022 as opposed to those acquired prior to this time frame. In the second quarter, we saw contribution margins of 9.5% or $31,000 per home for homes acquired after September of 2022. This is an important measure of our unit economics and speaks to the strengthening performance of homes in our inventory. Moving to the P&L. We generated $230 million of revenue, exceeding the top end of our guidance range by 15%. Our revenue was driven by the sale of 650 homes, which also exceeded the top end of our guidance range at an average selling price of $348,000. The lower average selling price in the second quarter is the result of our intentional focus on acquiring homes near the median in each market. This is where we see the strongest demand at the highest transaction volume. The $22.3 million net loss in the second quarter reflects a 62% improvement over Q1, and our adjusted EBITDA for the quarter improved to negative $17.3 million compared to negative $44.8 million in the first quarter. This reflects a 61% increase in adjusted EBITDA quarter-over-quarter. The sequential quarterly improvement in adjusted EBITDA was driven by significant increases in gross profit and disciplined cost reductions. Gross profit increased over 200%, primarily due to improved margins on more recently acquired homes and a lower number of legacy cohort sales. Our 9.7% gross margin reflects both a quarter-over-quarter and year-over-year improvement from the 1.2% gross margin in Q1 2023 and the 8.6% gross margin in Q2 last year. This is consistent with our expectation that gross margins and contribution margins would trend upward this year as the last of our inventory acquired prior to September 1, 2022, is sold and the positive performance of inventory acquired in recent periods is recognized. On the cost side, total operating expenses decreased 25% from $59 million in Q1 to $44 million in Q2 due to previously announced headcount reductions and other general cost reduction measures. Year-over-year, operating costs have decreased 48%. This is the fifth consecutive quarter of operating expense reductions, demonstrating our rigorous commitment to disciplined cost management. At our current level, we are well positioned to realize improving margins in the second half of the year. From a balance sheet perspective, our unrestricted cash balance increased to $115 million at the end of Q2, up from $108 million at the end of Q1. Inventory increased to $211 million from $173 million in the first quarter. This reflects an increase from 557 homes in inventory at the end of Q1 to 747 homes in inventory at the end of Q2. This increase in inventory was driven by the 840 homes we acquired in the second quarter, which exceeded our expectations and was more than double the 364 homes we acquired in the first quarter. Our inventory build, coupled with the aforementioned reduction in inventory aged over 180 days to less than 2%, highlights the quality of our current inventory. Our June 30 debt balance was $191 million. During the second quarter, we successfully extended the maturity date for our largest credit facility to June 2025, while maintaining our favorable terms and conditions, including interest rate spread and advance rates. We continue to have a blue-chip roster of lending partners that provide a strong foundation to our debt capital structure. Looking forward to the second half of the year, we expect Q3 to reflect the second quarter-over-quarter improvement in time to cash as well as increases in acquisitions, inventory and contribution margin after interest. We also expect Q3 to continue the trend of sequential improvement for gross margin, net loss and adjusted EBITDA that began in Q1. Specifically, in the third quarter of 2023, we expect to sell between 600 and 700 homes, generating revenue of between $200 million and $240 million. We also expect adjusted EBITDA to be between negative $17 million and negative $9 million, which represents another significant sequential improvement, bringing us closer to meeting our expectation of achieving positive adjusted EBITDA in the fourth quarter of this year. Our results in the first half of this year are a reflection of this team's rigorous commitment to adapting to changing market and economic conditions. Our revenue streams will continue to diversify beyond our cash offering, and we are excited to share more updates on these areas in the coming months. Our business has never been more resilient than it is today and has never been better positioned to capitalize on the tremendous opportunity in front of us. I joined Offerpad to help this team forever change the way real estate transacts, making it more efficient and driving more value. Given the volatility, uncertainty and ambiguity facing home sellers and buyers today, there has perhaps never been a more pressing time for our mission. We were built for this moment, and we can't wait to continue sharing our progress with you. And with that, I'll turn the call over to the operator to begin the question-and-answer session.

Operator, Operator

Our first question comes from Dae Lee with JP Morgan.

Dae Lee, Analyst

Great. I have two. So first, you talked about home acquisition fees for month-over-month. I was curious, revised that today from a home acquisition per month perspective. And is 500 per month, 500 a year still the right number to think about? And secondarily, on your unit economics and margins, I understand that it should improve from 2Q due to next year. But when you compare the contribution margin and gross margins relative to home after September of last year, we expect those margins to step up or stay stable, or should it come up as you accelerate your home acquisition fees?

James Grout, Senior Vice President, Finance

Thanks, Dave. This is James. Regarding your first question about our acquisition pace, we have seen month-over-month improvements. The target of 500 homes per month is significant, but as we aim for profitability, acquisition volume is just one factor. The returns from those homes, our cost-saving initiatives, and the shift in our product mix are also crucial. We will continue to focus on improving these areas while prioritizing maximizing returns over volume expectations. For your second question about the new cohort's performance and how contribution margin and margins will develop, it's important to note that our underwriting over the past few quarters has produced the largest spreads in the Q4 and Q1 timeframe. As market conditions improve and we feel more confident in certain areas, we have lifted some of that conservatism, ensuring we are purchasing the right homes that perform well. Moving into Q3 and Q4, we expect to see less negative impact on gross margin and contribution margin from legacy issues, and we anticipate returns for those cohorts will start to align more closely with our long-term contribution margin expectations.

Operator, Operator

Our next question comes from the line of Nick Jones with JMP Securities.

Nick Jones, Analyst

Can you provide insights on how the iBuyer solution or Offerpad solution is currently being received in the market? Given the stable prices and low supply, how does an iBuyer add value in this environment? Additionally, could you clarify how the situation has evolved over the past year and how homeowners, sellers, and buyers are responding to the iBuying solutions?

Brian Bair, Chairman and Chief Executive Officer

Yes, Nick, it's Brian. It's important to note that request volume has remained consistent throughout the year. We're experiencing patterns similar to the increase we observed over the past couple of years. Cash offers are more crucial than ever, as many customers seek them for certainty and control. This approach also enables them to purchase their next home without contingencies, accommodating their timelines due to limited supply. Much like before, when the market had low supply leading to significant home price appreciation, we are now facing a similar lack of supply. If a potential seller finds a home they desire, we can close on their schedule to ensure they can secure that home. Additionally, much of the competition among cash buyers has diminished. Currently, we only have two primary cash buyers operating at volume, which has created more opportunities than we previously had. As we continue to introduce more of our products, it further enhances the viability of our solutions.

Nick Jones, Analyst

Great. Can you provide an update on the newer products like Direct Plus, the listing service, and renovation as a service? What is the uptake on those, and how should we expect them to impact the P&L or the model over time?

Brian Bair, Chairman and Chief Executive Officer

Yes. Overall, we are signing up new partners every day for both Direct Plus and Renovate. It's exciting to see more customers using our renovation service, as well as using our Direct Plus service to purchase their homes and then having us renovate those homes for them. This focus on transactions will impact single-family homes and some other buyers in those channels. However, we are very pleased with the current market conditions and the direction of these products, and we are seeing good growth in both of them.

Operator, Operator

Our next question comes from the line of Ryan Tomasello with Stifel.

Ryan Tomasello, Analyst

Just, I guess, a follow-up on the prior remarks. Reading between the lines, it sounds like maybe maintaining a more tempered purchase volume stands over this quarter and next, but I guess maybe stronger margins, filling that gap to still allow you to hit the profitability targets. I mean how sustainable do you think these higher spreads are in the current environment given how tight inventory conditions are? And what are you looking for in terms of market conditions to get more comfort ramping volumes? Do you feel like that is completely under your control to widen the acquisition funnel with lower spreads? Or perhaps, is the ability to ramp volumes somewhat limited given the conditions out there?

Brian Bair, Chairman and Chief Executive Officer

Ryan, I'll start and then let James or Jawad add their thoughts. First, I’m pleased with the properties we're acquiring, as they align well with the median home price. This is a positive aspect of our current purchasing strategy. As we expand, we can increase our buying range to gain more market share and acquire additional homes. At the moment, we are paying close attention to mortgage rate fluctuations. Even a shift of 10 basis points is significant as we are monitoring these changes, especially with interest rates surpassing 7%. Despite a general decline in transactions nationwide, the market has shown remarkable resilience in terms of volume. There are indicators suggesting that the decrease might be even greater. Nevertheless, we're finding numerous opportunities to grow and acquire quality properties in a disciplined manner, focusing on what is within our control. I'm satisfied with our management of legacy inventory and our current position. Going forward, our attention will be on our purchasing strategy, and I feel optimistic about our overall situation. Now, I'll turn it over to James or Jawad.

James Grout, Senior Vice President, Finance

Yes. I would like to add that in our letter to shareholders, we included some interesting graphs that detail the contribution margin. These graphs particularly highlight the other services, including renovation, Direct Plus, Flex listing, and buyer services. It's been encouraging to observe that as we've reduced our volume, these other areas of our business have performed as we anticipated, contributing positively to our overall profitability in terms of contribution margin. As we look ahead and consider the number of homes we need to acquire for profitability, our strategy focuses on ramping up all of these areas collectively while maintaining a diversified income, which provides us with various opportunities and options moving forward.

Ryan Tomasello, Analyst

And then just an update on how you feel about the balance sheet here in terms of capital. Have you thought about how much volume you think you can drive off of the current equity base and how that compares to the volume you ultimately need to drive for not only cash flow breakeven, including the negative carrying cost on the financing side, but also ultimately to generate positive returns here in terms of the business model?

James Grout, Senior Vice President, Finance

Yes. I think there’s a couple of sides to that. The first one is with our current capital structure in terms of cash and our credit facilities on the debt side, we do have a plan that supports things going forward with that, right? The important thing about the leverage side of the business is coming out of the legacy inventory. You look at that sequential improvement in cash quarter-over-quarter, and a big part of that is going to be driven by leverage returning to normalized levels. Then you take this back to our ability to extend and renew our largest credit facility with the same favorable terms we’ve had in place and maintain those good relationships with our partners. That allows us to be very efficient with our capital. It’s a very – those facilities are daily warehouse facilities that have a lot of activity happening on them regularly, right? And that allows us to buy at the volumes that we’re anticipating.

Jawad Ahsan, Chief Financial Officer

Ryan, this is Jawad. I’d like to chime in here. So I feel great about the balance sheet. The team has done a lot of great work to get the credit facilities where we want them. We’ve got, as James mentioned, really good relationships there, and we’ve got the ability to have our volume grow and reflect the market opportunities that are in front of us. But the thing that – I love the question about our noncash offer solutions because that ultimately is one of the big reasons, I joined the company. We are positioning Offerpad to be more asset-light over time with more of our revenues coming from Direct Plus and FLEX and Renovations, and that’s going to sort of mute the need for us to have too much reliance on the credit facility, but the credit facility we do have we feel great about.

Operator, Operator

Our next question comes from the line of Michael Ng with Goldman Sachs.

Michael Ng, Analyst

I have one on the gross margins for the September '22 and later cohort really strong at nearly 13%. How are you thinking about the drivers of that 13% gross margin? What's the headline service fee? How much is home price appreciation during the holding period, how much contribution from renovation? And just as a quick follow-up to some of the questions asked earlier on the call. How are you thinking about your target home inventory balance? Obviously, you guys were carrying 3,000 to 4,000 homes at one point. What's the right way to think about what that looks like into 2024, 2025?

Brian Bair, Chairman and Chief Executive Officer

Mike, I'll start. This is Brian, and then James will contribute. What we're observing in our performance relates to our risk and underwriting approach, especially as uncertainty in the market has transitioned with our existing inventory. We're being more cautious in our underwriting. As the market stabilizes, we're able to reduce some of that risk. We're concentrating on homes priced between 250 to 450, which is a solid range right now with strong affordability. The Midwest and Florida markets are performing well, and we're very selective about the products we purchase. Additionally, the value we’re seeing from renovations is quite significant, possibly stronger than it’s ever been. A large portion of the homes entering the market are those requiring renovations, and we can realize value from those updates. Around 51% of the homes we’re analyzing are from before 1990, which means enhancing value through renovation is crucial. Our underwriting strategy and the value added through renovations are key, as they help ensure we have appealing homes for buyers and also reduce our time to cash, which I’m pleased to report is now under 100 days again. This is our target as we advance.

James Grout, Senior Vice President, Finance

Yes. To add to the inventory discussion, if we look back historically, our inventory turnover typically occurs on a quarterly basis. This means that the ending inventory we have will translate to the number of homes sold in the following quarter. Seasonal trends do play a role in this on a quarter-by-quarter basis. Generally, if we aim for an acquisition target of 500 homes a month, it would imply an inventory of around 1,500 units when adjusted for seasonality. However, it's crucial to revisit our previous comments about diversifying our product mix and focusing on Direct Plus, as this will shift based on market conditions and how our other product lines are developing. We will continue to adapt to these changes. Overall, our current capital base and our credit facility structure are equipped to support this level of activity.

Brian Bair, Chairman and Chief Executive Officer

And Mike, I know this wasn't your question, but just something that James said, maybe think of this as well is that one of the strengths of just the cash offer as well, relaunching Flex Sell that I talked about a little bit earlier is going to be key as well. Because as people see limited inventory, if they want to explore the open market and see what they can get on the retail side, we can help them with that as well, then have our cash offer as a backup, and that was a very popular product before we paused it, and relaunching that again will give people getting the flexibility of seeing what the market can do but also the cash offer. But the way, I just want to hit on that as well.

Operator, Operator

Our next question comes from the line of John Colantuoni with Jefferies.

John Colantuoni, Analyst

Great. Two about inventory and growth, starting with inventory. So you saw a ramp in homes purchased, but you're expecting homes sold to be about flat in the third quarter. If you keep making progress to your goal of 500 home purchases per month in Q3, our math suggests that would sort of imply you're going to end next quarter with about 1,000 homes in your inventory balance. Does that mean that we should expect to see sort of a substantial step-up in homes sold during the fourth quarter? And second question, when you think about transitioning the business from rightsizing inventory levels and improving efficiencies to reaccelerating growth next year, what are some key areas of sort of permanent efficiencies that you've been able to draw out of the business that will help you improve sort of the balance between growth and profitability over time?

Brian Bair, Chairman and Chief Executive Officer

Yes. I want to discuss our efficiencies. We have identified numerous areas for improvement and have reviewed our past performance, especially during the market slowdown and the rapid interest rate changes last year. Underwriting plays a crucial role in this process, and selecting the right inventory is essential. Additionally, we are achieving greater efficiency from our renovations and reservation teams. Since we are not purchasing thousands of homes each month, we can concentrate on various products we want to introduce. Our customer communication is stronger than ever, as indicated by our customer satisfaction scores and feedback. At the property level, we focus on underwriting segmentation through an internal project called Limelight, which helps us make smarter decisions with each home we acquire. We are continuously striving to learn and improve, and I’m proud of our strong efficiencies. I’m excited about our future progress, as this focus is critical to achieving profitability. Our teams discuss this daily, and it's vital as we navigate the current landscape.

James Grout, Senior Vice President, Finance

Yes. Regarding your question about inventory and sales pace, in Q2 we sold 650 homes. If we exclude the legacy inventory—those homes obtained in August and earlier from last year—we sold 491 million of new inventory in that quarter. The midpoint of our 650 homes sold represents about a 32% increase from the previous quarter. You're correct that as inventory grows, we expect this trend to continue in the future. However, I want to emphasize that Q4 is typically a slow month for real estate due to seasonal factors and the holidays. Given the current market uncertainties, we need to be careful with the inventory we are acquiring to ensure we are obtaining homes that will perform well in Q4.

Brian Bair, Chairman and Chief Executive Officer

The seasonality we've experienced over the past couple of years, due to a lack of supply, has not followed the traditional patterns we used to see. We've observed some seasonality, but it's not nearly as pronounced as it was a few years ago. The shortage in supply is certainly impacting the usual seasonal trends.

Jawad Ahsan, Chief Financial Officer

Yes. John, this is Jawad. I wanted to weigh in here as well. Look, it's been a challenging year. I wasn't here for it, but I love the way that we responded. I saw us take really difficult decisions and make tough decisions and actions to right-size our cost structure, and what I see now is a business that has fundamentally rightsized and gotten its costs and infrastructure positioned to grow profitably from here. It's not just profitability, but cash flow. We gave our guidance on profitability, but we're also laser-focused on getting that cash flow positive as well, and that's something that we're going to drive very hard towards.

Operator, Operator

Our next question comes from the line of Jay McCanless with Wedbush.

Jay McCanless, Analyst

The first one I had, in terms of the people who are selling homes to you, Brian, is it typically primary homeowners, family selling? Or have you seen an uptick in people who maybe thought they could be a landlord, couldn't pull it off and/or some of these Airbnb owners we've heard that are starting to bail? If you could maybe talk about that supplier base on your homes now versus maybe where it was a year ago or 2 years ago.

Brian Bair, Chairman and Chief Executive Officer

Yes, I think fundamentally, the situation is interesting. I was considering Airbnb when you mentioned that, since there's definitely some positive movement there. Given the current interest rates, many people are locked into their 3% or 4% mortgages, which limits the number of individuals moving for reasons like wanting a nicer kitchen or a bigger backyard. Most people are relocating with a specific purpose. The majority of the homes we are purchasing are from owner-occupants who are currently living in them. That said, we are observing an increase in activity with short-term rentals and even some long-term rentals. There has been more movement in that area as well. To your point, there was a surge in interest for short-term rentals and Airbnbs, and we are seeing heightened activity in that sector too. However, the vast majority of sellers are still owner-occupants selling their homes to us.

Jay McCanless, Analyst

Okay. That's great. And then my second question, can you elaborate on mortgage rate volatility, Brian? Is 8% too high even with the new spreads and maintaining the median price? This seems like the right strategy, but is there a point where if 30-year mortgage rates exceed a certain level, the underwriting will not be feasible for your purchases and sales?

Brian Bair, Chairman and Chief Executive Officer

We're monitoring the situation very closely. Not long ago, I would have said that a 7% mortgage rate would have been concerning. However, due to limited supply, demand remains strong for everything we put on the market. One key point that often gets overlooked is that we haven't experienced the home price drop many anticipated, and employment remains stable. Many homeowners are sitting on significant equity, often between $200,000 and $300,000, which they can use as a down payment. This can effectively reduce their mortgage amount from $500,000 to $250,000 or even $200,000, alleviating some of the pressure from higher interest rates. We're also seeing around 25% of buyers using cash, which relates to the equity I mentioned. Additionally, we're noticing a number of first-time homebuyers entering the market, particularly those transitioning from rentals over the past year or two who are eager to purchase a home while they have the opportunity. That’s a lengthy response, but I hope it addresses your question.

Operator, Operator

Thank you. That concludes the question-and-answer session, and that concludes today's conference call. I would like to thank you all for your participation. You may now disconnect your lines.