Zillow warns rising mortgage rates squeezed homebuyers’ budgets

Imagine a buyer who began looking for a home with a monthly principal-and-interest budget of $2,528.

At a 6.5% mortgage rate, that payment supports a $400,000 loan. When rates climbed closer to 7.5%, the same monthly payment could cover only about $362,000, based on the article’s calculations.

Nothing else about that buyer changed. Income, savings, and credit score were the same. The only difference was the rate, and about $38,000 in borrowing power vanished.

Zillow delivered that message to investors, and it helps explain why the company’s outlook for the next quarter came in well below expectations.

Chief executive Jeremy Wacksman said on the earnings call that mortgage rates had risen nearly 100 basis points, moving from the mid-6% range to the mid-7% range.

The speed of the rate jump caused the strain

Deutsche Bank analysts Kunal Madhukar and Benjamin Black examined the move in a note titled “Rate Shocks Likely Transitory, But Rebuilding Pipeline Could Take Time,” which TheStreet reviewed.

They described it as one of the steepest three-month increases in mortgage rates since the 1980s.

According to Madhukar, the biggest effect was not simply the higher level of rates, but how quickly they changed.

Buyers who entered Zillow’s sales funnel expecting to afford a certain home suddenly could not, he wrote.

Using a $400,000, 30-year fixed mortgage, the monthly principal-and-interest payment works out to $2,528 at 6.5%. At 7.5%, it rises to $2,797.

That adds about $269 a month, or roughly $3,200 a year, for the same loan. Over 30 years, the difference exceeds $96,000.

Rates have eased somewhat since then. Freddie Mac data compiled by Trading Economics showed the 30-year average at 7.18%, down from 7.32% two weeks earlier. A year earlier, the average was 6.22%.

What Zillow’s results revealed

Zillow’s third-quarter revenue increased 7% to $724 million, below the Street’s estimate of $753 million, according to the note.

The company’s guidance for the following quarter was even softer. Zillow projected revenue between $635 million and $665 million, along with adjusted EBITDA of $100 million to $135 million.

Deutsche Bank had expected $710 million in revenue and $178 million in EBITDA. The analysts also noted that Zillow shares finished the session at $33.90, a level last seen in September 2022.

The mortgage unit felt the impact first. Revenue climbed 32% to $70 million, but still came in below Deutsche Bank’s estimate because rate volatility hurt conversion.

CFO Jeremy Hofmann said on the call that affordability matters more for mortgage shoppers.

That makes Zillow especially sensitive. The analysts said its audience skews toward first-time buyers and lower-priced homes, where interest-rate changes have the biggest effect.

Some of the slowdown is intentional

Not all of the weakness is tied to rates.

Zillow is shifting agents to its Preferred model, under which it gets paid when a deal closes rather than when it sells advertising. That change delays revenue recognition.

Residential revenue fell 4% to $419 million, including an estimated 6-point drag from the transition. Zillow expects that segment to decline 9% to 15% in the next quarter, with the move accounting for a 9- to 10-point hit.

Even so, the analysts see a longer-term benefit. Preferred connections generate about 35% more revenue per connection than the older model, and roughly two-thirds of buyer connections already go to Preferred partners.

Madhukar said Zillow is giving up revenue recognition in the near term in exchange for better unit economics later.

For now, rentals is providing support. Rentals revenue rose 26% to $220 million, and multifamily properties reached a record 81,000.

Deutsche Bank’s view on Zillow, with a caveat

Madhukar kept a Buy rating on the stock but lowered his price target to $40 from $50, implying about 18% upside from the prior close.

He also reduced his 2027 EBITDA forecast to $757 million from $988 million, a decline of 23%.

The timing is the challenge. New buyers need to get pre-approved, work with an agent, search for a home, and close before Zillow earns revenue. Connections typically fall 20% to 25% from the third quarter to the fourth.

Deutsche Bank expects the rebuild to begin with connections in the early part of 2027, with closed deals following around the second quarter.

Madhukar said the company’s weaker near-term outlook may prove temporary.

What it means for homebuyers

If your budget felt tighter this fall, you are not alone, and you did nothing wrong.

It makes sense to recalculate what you can afford using the current rate rather than the one you saw over the summer. A preapproval from earlier in the year may no longer match what a lender would offer now.

Even small changes can matter. On a $400,000 loan, the move from 7.32% to 7.18% would save about $38 a month, based on the article’s math.

That does not restore the buying power lost over the summer. But if rates keep drifting lower, some buyers who were priced out could return, which is the pipeline Zillow is waiting for.