Shares of Zillow (NASDAQ: Z)(NASDAQ: ZG) were moving higher last month along with several real estate stocks as the sector benefited from expectations of falling interest rates.
In fact, Zillow stock soared when the Federal Reserve surprised some investors by cutting the Federal Funds rate by 50 basis points, kicking off a new rate-cutting cycle.
Though the stock gave up some of those gains later in the month, excitement over a rebound in the housing market, driven by falling mortgage rates, seemed to be the primary reason for the stock's gains in September. According to data from S&P Global Market Intelligence, Zillow finished the month up 16%.
As you can see from the chart below, the stock peaked after the Fed cut interest rates.
Is Zillow poised for a rebound?
As you can see, Zillow trended with the S&P 500 for the first week of the month before real estate stocks began to break out in anticipation of a rate cut.
Zillow received a favorable note from Citigroup to kick off the month as the big bank said it was "incrementally positive" on the stock after meeting with management. It noted that its newer products and services are scaling, and said its base of 230 million monthly unique users was an advantage.
Later in the month, Wedbush upgraded the stock to outperform with a price target of $80 as it said lower mortgage rates would be a key catalyst for the company and also credited its software and services initiatives.
Finally, the stock jumped on high volume as the Federal Reserve slashed interest rates by 50 basis points, a more aggressive cut than expected.
The stock rose 8% over a two-day span on high trading volume as falling interest rates should help drive a recovery in the business as the company's success is closely linked to the broader real estate and housing industry.
Image source: Getty Images.
Can Zillow keep gaining?
Zillow has the leading position in online real estate listings, but the company hasn't always been able to capitalize on that position. Its business is primarily advertising-driven, and the company faces some risks from the National Association of Realtors settlement, which did away with the traditional commission system.
It's unclear how that will affect Zillow, though lower commissions would likely impact advertising demand, and it could lead to fewer realtors in the industry, which would also be a headwind for Zillow.
Still, falling mortgage rates are clearly a positive for the stock. Zillow looks fairly valued after last month's gains, but it could move higher as the housing market reawakens.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zillow Group. The Motley Fool has a disclosure policy.
