Zillow's stock surges after analyst says start buying as mortgage rates fall

By Tomi Kilgore

Shares head for highest prices seen since February 2022 as part of broad rally in real estate related stocks

Shares of Zillow Group Inc. were set to extend their rally toward a more than two-year high on Monday, as falling U.S. mortgage rates and rental revenue strength prompted Wedbush analyst Jay McCanless to turn bullish on the provider of real estate information and brokerage services.

The rally was part of a broad rally in real estate related stocks ahead of the Federal Reserve's expected interest rate cut later this week.

Zillow's stock (Z) climbed 3.9% in morning trading, to put it on track for the highest close since February 2022, after running up 12% last week.

The stock has now soared 29.3% over the past three months, while the S&P 500 index SPX has edged up 3.4%.

Wedbush's McCanless raised his rating on the stock to outperform from neutral. He also raised his price target to $80 from $50, with the new target implying about 29% upside from current prices.

He noted that after mortgage rates peaked above 7.5% in April, they dropped to about 6.1% last week, the lowest rate in more than a year. Lower borrowing costs can make buying a home more affordable.

And there's scope for further declines, as the Federal Reserve is widely expected to kick off later this week a new interest rate-cut cycle, that could last into next summer.

Read: Mortgage rates are falling ahead of the Fed's planned rate cut. How borrowers can capitalize.

Separately, Zillow announced Monday that according to new analysis from Zillow Home Loans, a monthly mortgage payment is now less expensive than rent in 22 of the 50 largest metropolitan areas.

"The monthly cost of homeownership may be more attainable than people think," Zillow said.

"Recent dips in mortgage rates, which have fallen to the lowest level since early 2023, have significantly reduced monthly payments," Zillow added.

McCanless said not only should lower mortgage rates be a "positive catalyst" for Zillow's core brokerage business, he believes the company's software and services business could continue to provide a boost.

The company's S&S offerings, which is part of Zillow's residential segment, "have allowed total revenue to grow faster than the national existing home market for several quarters now," McCanless wrote in a note to clients.

He raised his fiscal 2025 revenue growth estimate for the residential segment to 17% from 12.5%, and doubled his growth rate estimate for rental revenue to 10% from 5%.

"Rental revenue growth has consistently exceeded our forecasts in [second half of fiscal 2023] and [the first half of fiscal 2024]," McCanless wrote. "With apartments under construction still near all-time highs, we believe the revenue momentum from new rental listings may be a multiyear catalyst."

Zillow's stock wasn't the only one in the real estate business that has been getting a boost from lower rates. Shares of real-estate services company Redfin Corp. (RDFN) fell 3.8% in early Monday trading, but that was after it rocketed 55.2% last week, the biggest weekly gain since it went public in July 2017.

Re/Max Holdings Inc.'s stock (RMAX) advanced 1.6% on Monday, to put it on track for its highest close this year, after soaring 21.9% last week.

Elsewhere, shares of CoStar Group Inc. (CSGP) tacked on 0.3% and Anywhere Real Estate Inc. (HOUS) gained 0.9%.

And it's not just shares of home sellers that have been rallying, those of home builders have as well. Both the iShares U.S. Home Construction ETF ITB and the SPDR S&P Homebuilders ETF XHB were trading up 0.2% in morning trading Monday, with both on track to close at record highs.

-Tomi Kilgore

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09-16-24 1049ET

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