By The housing market experienced a significant slowdown in the latter half of 2023. However, despite initial concerns, the impact on Zillow’s fourth-quarter earnings might be less severe than anticipated, as stated by a team of analysts.
As the traditionally busy spring home buying season approaches, the housing industry is confronting a subdued market. According to data from the National Association of Realtors, existing-home transactions in 2023 hit their lowest level in almost three decades. A notable increase in mortgage rates throughout the year, reaching a peak of around 8% in October according to Freddie Mac data, effectively priced out some potential buyers and dissuaded homeowners from listing their properties.
This challenging environment had an impact on Zillow’s largest segment during the third quarter. While the company’s overall revenue grew, propelled by a surge in its rental segment, its residential revenue, which includes the Premier Agent lead-generation business, declined by 3% compared to the previous year, amounting to $362 million.
Zillow’s CEO, Rich Barton, and CFO, Jeremy Hofmann, expressed satisfaction with the performance despite the downturn. In a shareholder letter published on November 1, they highlighted that Zillow’s residential revenue decline of 3% outperformed the wider industry’s decline of 14% by 1,100 basis points.
Zillow is scheduled to release its fourth-quarter earnings after the market closes on Tuesday.
During a conference call, Hofmann provided insight into Zillow’s expectations for the fourth quarter’s revenue. He stated that it is projected to range between $430 million and $455 million, representing a 2% increase at its midpoint. This stands in contrast to the estimated decline of 8% to 13% in the existing home industry’s transaction volume for Q4.
Zillow’s Fourth Quarter: A Look at Home Sales and Market Outlook
The fourth quarter of 2023 has displayed some sluggishness in home sales, but analysts from KeyBanc Capital Markets shed light on a potential brighter outcome in a note released on Feb. 11. Despite Zillow’s prediction of a 10.5% decline in industrywide home sales, the analysts suggest that the decline may have been milder, estimating it at approximately 6%. They attribute this potential outperformance to a significant drop in mortgage rates, which decreased by 110 basis points since the time of Zillow’s guidance.
Freddie Mac data shows that mortgage rates fell consistently throughout November and December, putting them at approximately 6.6% by the end of 2023. This dip in rates has offered an encouraging sign for the housing market, reflecting positively on sentiment and mortgage applications.
However, despite these positive developments, Canaccord Genuity Capital Markets analysts caution that Zillow’s growth may still be impacted by the current macro backdrop. While there has been some improvement, historically elevated rates and depressed housing inventory continue to pose challenges. Nonetheless, Zillow remains focused on surpassing industry expectations through strategic initiatives aimed at enhancing conversion and connection volumes.
One of the major hurdles for prospective buyers is the limited supply of homes for sale, which remains approximately 40% lower than the 10-year average, according to KeyBanc analysts. Homeowners are seemingly reluctant to list their properties due to the majority of mortgages being locked into rates significantly lower than the current market rates. The combination of rising home prices and limited affordability is likely to continue constraining transaction volume.
Looking ahead, there is reason to believe that Zillow’s fourth quarter performance could be stronger than expected, thanks to the notable decline in mortgage rates. While challenges persist in the housing market, Zillow remains committed to innovating its approach and striving for growth beyond industry norms.
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