Why Zillow Group Shares Gained 15% in September

Actions of Zillow (Z -1.69%) (ZG -1.71%) moved higher last month, along with more housing stocks, as the sector benefited from expectations of lower interest rates.

In fact, Zillow stock rose when the Federal Reserve surprised some investors by cutting the federal funds rate by 50 basis points, setting off a new rate-cutting cycle.

Although stocks gave up some of those gains later in the month, excitement over a rebound in the housing market, driven by falling mortgage rates, appeared to be the main reason for stock gains in September. According to data from S&P Global Market Intelligence, Zillow ended the month up 16%.

As you can see from the chart below, stocks peaked after the Fed cut interest rates.

ZG data by YCharts

Is Zillow ready for a comeback?

As you can see, Zillow was trending with S&P 500 for the first week of the month before housing stocks begin to explode in anticipation of a rate cut.

Zillow received a favorable rating from City Group to start the month as the big bank said it was “bullishly positive” on the stock after meeting with management. She noted that its newer products and services are expanding and said its base of 230 million monthly unique users is an advantage.

Later in the month, Wedbush upgraded the stock to outperform with an $80 price target as it said lower mortgage rates would be a key catalyst for the company and also credited its software initiatives and services.

Finally, stocks rose on high volume as the Federal Reserve cut interest rates by 50 basis points, a more aggressive cut than expected.

Shares rose 8 percent in a two-day period on heavy trading volume as falling interest rates should help the business recover, as the company’s success is closely tied to the broader property and real estate industry.

Image source: Getty Images.

Can Zillow Keep Winning?

Zillow holds the leadership position in online real estate listings, but the company hasn’t always been able to capitalize on that position. Its business is primarily based on advertising, and the company faces some risks following the award of the National Association of Realtors, which eliminated the traditional commission system.

It’s unclear how this will affect Zillow, though lower commissions would likely impact advertising demand and lead to fewer realtors in the industry, which would also be a headwind for Zillow.

Still, falling mortgage rates is clearly a positive for stocks. Zillow looks fairly valued after last month’s earnings, but could move higher as the housing market recovers.