Challenges for Zillow Group Amidst Rising Home Prices and Legal Issues

Zillow Group (ZG) experienced a decline in trading on Wednesday as an analyst expressed concerns over the stock's performance. BofA Securities analyst Curtis Nagle downgraded Zillow shares from Buy to Neutral, although he did raise his price target on the stock to $60 from $47. Currently, shares are down 1.6% to $54.55.

Nagle's decision to downgrade the stock was influenced by Zillow's substantial year-over-year gain, suggesting that the online real estate marketplace has already factored in a housing market recovery. One factor contributing to this recovery is the decline in mortgage rates. According to Freddie Mac, the average 30-year fixed mortgage rate is currently at 6.6%, down from a high of 7.8% in October.

Despite lower mortgage rates, Nagle believes that near-record low home affordability may limit the volume of transactions even with the reduced rates. In his research note, he warned about the record increase in home prices witnessed in 2023.

Additionally, Nagle cited real estate commission lawsuits as another challenge facing Zillow. In 2023, a federal jury ruled that the National Association of Realtors and residential brokerages had colluded to maintain artificially high fees. He expressed concerns about the potential disruption and negative impact on investor sentiment caused by mounting real estate commission lawsuits.

When approached for comment, Zillow did not respond immediately. However, Chief Executive Richard Barton expressed confidence in Zillow during an earnings call in early November, stating that the company is well-positioned to thrive under any circumstances.

Despite Nagle's downgrade, not all analysts share his pessimism. JMP Securities analysts upgraded Zillow to Market Outperform from Market Perform in December with a price target of $60. They believe that consensus estimates for 2025 and 2026 are too low, given the growing pent-up demand and the expectation of declining rates in the second half of 2024.