Revolutionizing Housing: Zillow’s Impact and the NAR Settlement
Since its inception close to two decades ago, Zillow has transformed the way Americans buy, rent, sell, and even dream about housing in the United States. However, a recent settlement between the National Association of Realtors (NAR) and home seller groups could potentially pose significant challenges for the leading real estate platform, particularly in a competitive housing market that is witnessing declining traffic.
Impact of the NAR Settlement on Zillow
Zillow’s stock has witnessed a notable decline, dropping nearly 13% since the $418 million settlement, which marked an end to the standard 6% commission for Realtors. This development has left investors concerned about potential repercussions on various aspects of the housing industry, ranging from home buying and selling prices to industry incomes and the technology supporting it.
Zillow’s Warnings and Analyst Perspectives
In a 10-K filing last month, Zillow acknowledged the potential consequences of reduced agent commissions, stating that such a change “could reduce the marketing budgets of real estate partners or reduce the number of real estate partners participating in the industry, which could adversely affect our financial condition and results of operations.”
Dan Kurnos, managing director at The Benchmark Company, expressed skepticism about the magnitude of these concerns. According to him, it was not the monetary settlement headline that led to Zillow’s price decline but rather “the multitude of articles ‘guaranteeing’ the death of the real estate agent and the buyer’s commission that likely prompted the drop.”
Zillow’s Leading Position in the Market
Despite these challenges, Zillow continues to dominate its market. With a vast database of over 160 million US homes, its residential revenue has outperformed the real estate industry average for six consecutive quarters. In 2023, Zillow reported an impressive 12 percentage point advantage over the residential real estate industry, which experienced a total revenue decline of 17% from the previous year.
Zillow’s Business Model and Potential Adjustments
A substantial portion of Zillow’s revenue comes from lead generation for real estate agents. Premier Agent, the product that enables agents to pay for connections with potential homebuyers, is one of Zillow’s primary sources of income. Additionally, agents pay for stronger presence on the site and ai-enhanced listings that highlight features attractive to homebuyers in a particular market.
With reduced fees for agents, they are expected to have less disposable income for such services. If Zillow does not adapt its business model accordingly, it could face significant revenue drops. However, some analysts argue that Zillow has been preparing for these changes for months and might have alternative sources of income such as rental market investments, home loans, display ads, and new real estate software.
Competition in the Real Estate Market
Redfin, another popular real estate platform, also experienced a decline following the settlement news, with shares falling approximately 12%. Homes.com, the parent company of CoStar Group, has emerged as a potential winner from the chaos, with its shares increasing nearly 10% since the settlement. The unique business model of Homes.com, which charges agents for extra visibility on their listings and enables direct contact between buyers and listing agents, could become increasingly valuable in a market where more buyers might represent themselves.
Future of Zillow and the Real Estate Industry
There is significant disagreement among analysts regarding the future of Zillow and the real estate industry as a whole. While some, like Kurnos, rate Zillow as a buy with a $60 price target, others, such as Bank of America and Spruce Point Capital, have downgraded or urged shorting the stock.
Regardless, it is clear that Zillow, along with the real estate industry, stands at a significant inflection point. The NAR settlement marks a shift in commission structures and agent fees that could reshape how housing is bought, sold, and marketed. Only time will reveal the full implications of these changes on Zillow and the industry at large.
