The news this week from the Federal Reserve has sent Zillow(NASDAQ: Z)(NASDAQ: ZG) shares sharply higher. According to data provided by S&P Global Market Intelligence, the real estate tech company's shares jumped by as much as 14.8% this week and were up by 12.7% for the week as of 10:30 a.m. ET Friday.
Interest rates and the housing market
The Fed cut the federal funds rate -- its benchmark short-term interest rate -- by 50 basis points (0.5 percentage points) at its meeting this week, and many economists are anticipating more cuts this year. If the Fed acts as expected, it could meaningfully lower borrowing costs for homebuyers.
While that was the market's thought this week, the reality may be more complex. Though the 10-year U.S. Treasury rate, which is a benchmark for mortgages, has fallen from 4.3% to 3.7% over the past three months, it rose slightly over the past week. That's because investors are worried that the Fed's rate cut indicates a weak U.S. economy.
How Zillow wins from lower rates
Zillow isn't directly a housing company; rather, it operates a marketplace for homebuyers, sellers, agents, and other related businesses. The company's main business generates revenue from agents advertising 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, although Zillow resells these mortgages, so again, its benefits would largely derive from higher volumes, not just lower rates.
While I think the Fed's policy shift is providing incremental positives for Zillow, the housing market won't make a quick recovery, 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 some momentum for Zillow -- this week.
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Travis Hoium has positions in Zillow Group. The Motley Fool has positions in and recommends Zillow Group. The Motley Fool has a disclosure policy.
