Zillow (ZG, Financial) is gaining traction with investors as it hits a new 52-week high. The anticipation of the Federal Reserve lowering interest rates by at least 25 basis points, potentially even 50 bps, is fueling investor optimism. Lower rates are expected to rejuvenate the sluggish housing market, particularly by the key spring selling season, which should benefit Zillow.
- Home prices have been rising despite increasing rates due to limited supply. Homeowners with 3% mortgage rates have been reluctant to move to new homes with higher rates. However, with declining rates, many homeowners might finally decide to move, which is positive news for Zillow.
- Zillow struggled in the 2021-22 period, partly due to its venture into buying, renovating, and selling homes. This move skewed its financials and overshadowed its core business as an online marketplace. To its credit, Zillow exited this business quickly and refocused on its core competencies.
- Zillow has been enhancing its core areas. The Residential segment, which partners with realtors and lists homes for sale, has seen improvements. Investments in top- and mid-funnel experiences are driving better connection rates. Additionally, Zillow's integration of touring technology into its buyer flow process has been well-received, improving its ability to identify high-intent customers.
- While Residential remains Zillow's largest segment, the company is expanding into adjacent areas like rentals and purchase mortgages. The Rentals segment now accounts for 20% of total revenue and is growing rapidly. In Q2, Rentals revenue surged 29% year-over-year to $117 million, mainly driven by a 44% year-over-year growth in multifamily revenue.
Overall, Zillow is worth keeping an eye on. Lower rates by next spring could stimulate the housing market, releasing pent-up demand from homeowners previously locked into their homes by higher rates. The rental market remains strong for Zillow, and the recent promotion of Jeremy Wacksman from COO to CEO adds to the company's fresh outlook. Investors are taking a renewed interest in Zillow.
