Why Zillow Stock Soared This Week

This week’s news from the Federal Reserve has been sent Zillow (Z -1.55%) (ZG -1.20%) much higher odds. Shares of the real estate technology company are up as much as 14.8% this week and were up 12.7% for the week as of 10:30 a.m. ET on Friday, according to data from S&P Global Market Intelligence.

Interest rates and the housing market

The Fed cut the federal funds rate — the benchmark short-term interest rate — by 50 basis points (0.5 percentage point) at its meeting this week, and many economists expect more cuts this year. If the Fed acts as expected, it could significantly lower borrowing costs for homebuyers.

While that was the market’s thinking this week, the reality may be more complex. Although the 10-year U.S. Treasury rate, which is a benchmark for mortgages, has fallen from 4.3 percent to 3.7 percent in the past three months, it has risen slightly in the past week. That’s because investors are concerned that the Fed’s rate cut points to a weak U.S. economy.

How Zillow Earns from Lower Rates

Zillow is not directly a housing company; rather, it operates a marketplace for home buyers, sellers, agents and other related businesses. The company’s core business is generating revenue from agencies that advertise on the platform. So a higher volume of home sales would be good for Zillow.

Its home mortgage business would benefit more directly from lower interest rates, though Zillow resells those mortgages, so again its benefits would derive largely from higher volumes, not just lower rates .

While I think the Fed’s policy change provides incremental positives for Zillow, the housing market won’t recover quickly, so the stock is still a long-term investment. But it’s good for shareholders to see some upbeat news for the housing market — and a boost for Zillow — this week.