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Since its founding nearly 20 years ago, Zillow has revolutionized the way Americans buy, rent, sell and fantasize homes in the United States.
But a settlement that breaks the grip of powerful real estate agents could pose a range of problems for a platform already suffering from declining traffic in an increasingly competitive housing market.
The company's stock has fallen nearly 13% since Friday's $418 million settlement between the National Association of Realtors and a group of home sellers that ended the standard 6% commission for real estate agents.
Investors know this settlement has major implications for the entire housing industry, changing everything from how much Americans pay to buy and sell homes, to the incomes of those in the industry, and even the technology that supports it. This shows that they are concerned about the possibility.
Zillow made this point itself in its annual report last month, when the company warned: Our financial condition and results of operations may be adversely affected. ”
But at least one analyst says the media is blowing this out of proportion.
“It wasn’t because of the economic headlines.” [Zillow’s] Prices have fallen,” said Dan Karnos, managing director of Benchmark Company. “The death of a real estate agent and numerous articles 'guaranteeing' buyers' commissions likely caused the decline.”
Despite these issues, Zillow still leads the market.
With data on well over 160 million U.S. homes, the company's housing revenue has outperformed the real estate industry average for six consecutive quarters.
However, it is still a declining market. Zillow reported that he outperformed the residential real estate industry by 12 percentage points in 2023. Total industry revenue was down 17% year-over-year, with Zillow reporting a 5% decline.
The company is currently at a crossroads with the NAR settlement and will need to adjust its business model accordingly.
That's because one of the main ways Zillow makes money is through lead generation for real estate agents.We offer a product called Premier Agent This allows agents to pay to connect with customers who are most likely to buy a home.
Zillow also makes money from agents who pay to have a stronger presence on the site and pay for AI-enhanced listings that highlight features that particular homebuyers like. . The market is most interested.
Therefore, as expected, if this ruling reduces commissions to agents, agents are likely to spend less on these products. Unless Zillow changes its model, it could lead to a significant drop in revenue.
Still, some analysts say Zillow has been preparing for these changes for months.
Anyone who has been listening to Zillow on the phone or at a recent conference will know that this settlement is what the company was hoping for, Kurnos said.
Other analysts disagree.
Activist short-seller group Spruce Point Capital launched a campaign against Zillow before the settlement, saying pressure such as changes to real estate agent fees could “disrupt the structure of real estate commissions.” insisted.
“Based on our research, we estimate the downside risk to be 40% to 60%,” Spruce Point analysts said.
The settlement is not yet final.
A judge would have to approve, but even then, “the industry will likely try to use informal mechanisms to stay within the 5% to 6% fee range,” said Stephen Brobeck, a senior fellow at the Consumer Federation of America. he says. He told CNN an umbrella group of nonprofit consumer organizations.
Zillow reiterated that uncertainty in a statement to CNN on Monday. A spokesperson said: “Changes in the structure of real estate transaction costs are so new that it is difficult to understand how they will affect trends in the housing market.''
However, the spokesperson added that Zillow remains optimistic. The NAR settlement is “just the next step in an already long and complex process,” they said. We continue to believe that positive change for consumers also benefits agents who serve consumers well on both sides of the transaction. ”
The company is looking for other ways to make money and is investing heavily in the rental market, which will account for 20% of revenue in the second half of 2023. The company also focuses on mortgage lending, display advertising, and new real estate software.
“Zillow has become the technological backbone of the real estate industry, with the majority of its revenue coming from the top 20% of agents,” Kurnos said. Zillow could make even more money if real estate agents offered their services piecemeal, he said.
Similar real estate platform Redfin also jumped on the news. The stock has plunged about 12% since Friday.
But one potential winner emerged from this chaos.
Shares of CoStar Group, Homes.com's parent company, have soared nearly 10% since Friday.
Homes.com plans to spend $1 billion on advertising this year. It operates by charging agents a fee to increase the visibility of their listings, giving buyers direct access to listing agents.
This is an important distinction in the future, when more buyers are likely to become their own agents.
William Blair analysts said in a note that the terms of the NAR settlement could further increase the importance of seller agents in transactions. This is another big plus for the CoStar business model.
There's a lot of disagreement among analysts about the future of Zillow and the real estate industry as a whole.
Kurnos rates Zillow a “buy” and has a price target of $60 per share. Bank of America downgraded the stock from “buy” to “neutral,” and Spruce Point Capital said it would sell the stock short.
What is clear is that Zillow and the real estate industry are at a tipping point.
