The U.S. housing market is experiencing a severe inventory squeeze, driven by low supply and consistent demand. Despite an increase in housing prices and rising mortgage rates, buyers continue to flock to available properties, hoping to lock in a home before conditions worsen. As of August 2024, existing home sales had dropped significantly compared to previous years, mainly due to the limited number of homes available for sale. Yet, this scarcity, paired with pent-up demand, has sustained property values in most markets.
In this challenging environment, real estate platforms like Zillow Group, Inc. (Z) have adapted quickly, seeking ways to remain essential to both homebuyers and real estate agents. Zillow, already a dominant player in the online real estate space, is positioning itself as a key resource, using technological advancements to simplify transactions, attract users, and grow its revenue streams.
Zillow’s Role in Capitalizing on the Housing Market
Zillow has long been more than just a home-listing website. With its massive user base—averaging 231 million unique visitors per month in Q2 2024—Zillow serves as a hub for buyers, sellers, and renters alike. In a market with constrained supply, it becomes increasingly vital to connect serious buyers with available listings. Zillow achieves this through its comprehensive real estate platform, which includes Zillow Premier Agent, a tool designed to connect potential buyers with real estate agents, and Zillow Rentals, a fast-growing segment catering to the multifamily rental market.
During the second quarter of 2024, Zillow's Residential segment, which includes Premier Agent services, saw 8% year-over-year growth in revenue, reaching $409 million. This growth occurred despite broader market challenges, such as reduced transaction volumes in the real estate sector. With 80% of its traffic coming from organic sources, Zillow continues to leverage its brand strength, providing digital tools that streamline the buying and renting processes.
Innovations Fueling Zillow’s Growth
Zillow’s approach to tackling the housing market’s current complexities includes implementing cutting-edge features powered by artificial intelligence. In 2024, Zillow introduced several AI-driven innovations aimed at refining the user experience. One such tool is the “BuyAbility” feature within the Zillow app, which provides real-time personalized estimates of home affordability based on a user’s budget and current mortgage rates. By integrating such features, Zillow aims to keep users engaged and encourage them to make confident buying decisions, even as mortgage rates remain volatile.
Zillow has also expanded its “Real Time Touring” service, enabling potential buyers to schedule home tours instantly. The platform’s integration of AI in these services not only helps buyers but also boosts the efficiency of agents using Zillow’s system, as these leads are often more likely to convert to actual sales. In fact, Zillow reported that these AI-driven connections convert at three times the rate of standard online interactions.
Additionally, the company’s focus on Rentals has paid off significantly. Multifamily rental revenue surged by 44% year-over-year in Q2 2024, driven by a growing inventory of listed properties and a partnership with Realtor.com to boost exposure. Zillow’s Rentals segment, now contributing 20% of total company revenue, has established itself as a key growth driver amidst a tight housing market.
Financial Performance: Earnings, User Growth, and Profitability
Zillow’s financial performance in the second quarter of 2024 exceeded market expectations. The company’s revenue increased 13% year over year to $572 million, beating Wall Street estimates by 6.3%. Notably, its adjusted EBITDA margin rose to 23%, a 100-basis point improvement from the prior year. This reflects effective cost management and growing efficiency in the company’s core business segments.
However, Zillow's bottom line still shows a GAAP net loss of $17 million for Q2 2024, albeit a significant improvement over its $35 million loss in the same period the previous year. This reduction in losses stems from rising revenues in Rentals and Mortgages, the latter experiencing a 42% increase in revenue during Q2. Despite high interest rates, Zillow managed to originate $756 million in home loans, marking a 125% jump from the year prior.
Zillow’s cash position remains strong, with $2.6 billion in cash and investments as of June 2024, although down from $2.9 billion in the prior quarter. This liquidity gives Zillow significant flexibility to weather economic challenges and continue investing in its growth strategies.
Risks: Economic Headwinds and Rising Mortgage Rates
Zillow’s growth is not without risks. Rising mortgage rates, which hit a two-decade high this year, have severely impacted the affordability of homes for average buyers. As interest rates rise, fewer buyers are likely to qualify for loans, reducing the pool of potential customers in Zillow’s home-buying and mortgage segments. Additionally, economic uncertainty—marked by inflationary pressures and potential labor market slowdowns—could further dampen demand.
Zillow has diversified its revenue base to mitigate some of these risks, particularly with the growing success of its Rentals division. However, the reliance on the broader housing market means that shifts in consumer behavior, particularly due to interest rates, will continue to pose challenges. Investors should also be aware of regulatory uncertainties, especially in areas such as data privacy and real estate transaction oversight.
Investor Takeaway
Zillow remains well-positioned for long-term growth, leveraging its technological innovations, massive user base, and strong brand recognition. The company’s focus on AI tools and expanding its rental marketplace will likely continue to drive revenue, even as the broader housing market faces headwinds. For investors, Zillow’s recent performance and strategic investments present a compelling case, though rising mortgage rates and economic uncertainty warrant a cautious approach. Investors could consider taking a position in Zillow, especially for exposure to a digitally-driven real estate market that is evolving, but it may be wise to closely monitor interest rate trends and the company's path toward sustained profitability.
