Picture a buyer who started house hunting in July with a $2,528 monthly budget for principal and interest.
At a 6.5% mortgage rate, that payment covers a $400,000 loan. By early October, with rates near 7.5%, the same payment covers only about $362,000, by my math.
Nothing about that buyer changed. Their income, savings, and credit score stayed the same. The rate moved, and roughly $38,000 of borrowing power disappeared.
That’s the story Zillow (Z) just told investors, and it’s why its fourth-quarter outlook came in far below forecasts.
“Mortgage rates have risen nearly 100 basis points from mid 6% at the end of June to mid 7% by early October,” CEO Jeremy Wacksman said on the company’s earnings call.
The speed of the mortgage rate move did the damage
Deutsche Bank analysts Kunal Madhukar and Benjamin Black dug into that shift in a Nov. 5 note titled “Rate Shocks Likely Transitory, But Rebuilding Pipeline Could Take Time,” seen by TheStreet.
They called it one of the sharpest three-month rate increases since the 1980s.
“The immediate impact was less about the absolute level of rates and more about the speed of the move,” wrote Madhukar.
Buyers who entered Zillow’s funnel in July and August “expecting to afford a certain home suddenly could not,” he added.
Run the same move on a $400,000, 30-year fixed loan. The monthly principal and interest payment is $2,528 at 6.5%. At 7.5%, it climbs to $2,797.
That’s $269 more every month, or about $3,200 a year, for the same loan, by my math. Over a full 30-year term, the gap tops $96,000.
Rates have eased a bit since. The 30-year average was 7.18% on Nov. 5, down from 7.32% on Oct. 22, Freddie Mac data compiled by Trading Economics showed. A year earlier, it was 6.22%.
What Zillow’s numbers showed
Zillow’s third-quarter revenue rose 7% to $724 million, short of the Street’s $753 million, the note showed.
Its fourth-quarter guidance was worse. Zillow expects revenue of $635 million to $665 million and adjusted EBITDA of $100 million to $135 million.
Deutsche Bank had been expecting $710 million in revenue and $178 million in EBITDA. Zillow’s stock closed at $33.90 on Nov. 4, a level last seen in September 2022, the note said.
More on Zillow:
- Zillow warns Americans on housing market, mortgage rates
- Zillow finds 34% of buyers cry during home-buying process
- Zillow cuts 7% of workforce despite double-digit growth
The mortgage business felt it first. Revenue rose 32% to $70 million, but it missed Deutsche Bank’s forecast as rate swings reduced conversion.
“Affordability has a larger impact on mortgage buyers,” CFO Jeremy Hofmann said on the call.
That hits Zillow harder than most. Its audience leans toward first-time buyers and lower-priced homes, where rate sensitivity is highest, the analysts wrote.
Part of Zillow’s slowdown is on purpose
Not all of the pain comes from rates.
Zillow is moving agents to its Preferred model, which pays Zillow when a deal closes instead of charging for advertising. That delays revenue.
Residential revenue fell 4% to $419 million, including an estimated 6-point drag from the switch. Zillow expects that revenue to drop 9% to 15% in the fourth quarter, with the transition costing 9 to 10 points.
Related: Zillow offers to cover homebuyers’ entire FHA loan down payment
The analysts see a payoff later. Preferred connections bring in about 35% more revenue per connection than the old model, and two-thirds of buyer connections already go to Preferred partners.
“The trade-off is that Zillow is sacrificing revenue recognition today for what should ultimately be better unit economics,” wrote Madhukar.
Rentals is carrying more weight in the meantime. Rentals revenue rose 26% to $220 million, and multifamily properties hit a record 81,000.
Deutsche Bank’s Zillow call, and the catch
Madhukar kept his Buy rating and cut his price target to $40 from $50. By my math, that implies about 18% upside from the Nov. 4 close.
He also cut his 2027 EBITDA forecast to $757 million from $988 million, a 23% reduction.
Timing is the catch. New buyers have to get pre-approved, find an agent, shop, and close before Zillow gets paid. Connections usually fall 20% to 25% from the third quarter to the fourth.
Deutsche Bank expects the rebuild to start with connections in early 2027, turning into closed deals around the second quarter.
“We think Zillow’s currently challenged near term outlook could simply be transitory,” wrote Madhukar.
What this means if you’re buying a home
If your budget got squeezed this fall, you’re not alone, and you didn’t do anything wrong.
I’d rerun your numbers at today’s rate rather than the one you saw in the summer. A preapproval from July may no longer match what a lender will offer now.
Small moves still matter. On a $400,000 loan, the drop from 7.32% to 7.18% since late October saves about $38 a month, by my math.
That won’t win back the summer. But if rates keep drifting down, buyers who were priced out could start coming back, and that’s exactly the pipeline Zillow is waiting on.
Related: Warren Buffett’s Berkshire Hathaway shares mortgage warning