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Zillow’s Incredibly Shrinking Addressable Market!

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On March 15th, 2024, the National Association of Realtors (NAR) proposed a settlement to end the multiple lawsuits they were facing over the issue of how residential real estate commissions were set and shared. The NAR agreed to pay $418 million to help compensate home sellers in the U.S.

To make a long story short, the NAR agreed to no longer require a listing broker to offer and disclose any upfront compensation to a buyer’s agent. I have written previous articles on how this will radically transform the Property Technology industry. Today I will explain the dramatic effect it will have on Zillow in particular.

Currently, there are approximately 2.8 million licensed real estate agents in the U.S.  To be fair, many of those are not that active and may only participate in the industry on a part-time basis. These licensed agents, particularly the agents focused on representing home buyers, are the core customers for Zillow’s buyer leads.

This is where the problem starts for Zillow. The NAR proposed rule changes will make it harder for buyer’s agents to get the traditional 3% commission on a residential transaction. Many are predicting the buyer’s agent commissions will drop significantly over time. To make matters worse, as it becomes harder for buyer’s agents to earn a living they will leave the industry which reduces the number of customers available to buy Zillow’s leads.

But it gets even worse. According to a William Blair survey from October 20, 2023, in which 166 residential agents were questioned about the industry some disturbing insights were revealed.

  • Only 9% of survey respondents said Zillow Premier Agent was “Highly Important” to their business. 23% said it was “Not Important”. For Zillow Flex it 4% “Highly Important” versus 16% responding “Not Important”.
  • 58% said they don’t use Zillow Premier Agent and 76% don’t use Zillow Flex.
  • When existing Zillow customers were asked if Zillow Premier Agent will be more important to your business in the next 1-2 years 7% responded “More Important” but 25% said “Less Important”
  • Finally, when asked why they do not pay for leads from home search portals 52% said they were too expensive and 51% said lead quality was low (they could select more than one reason)

So, the takeaway here is the commissions Zillow’s customers use to pay for marketing is likely to decline dramatically. The number of existing and potential customers (licensed agents) will drop significantly. Existing customers say your leads will be less important than more important at an almost 4:1 ratio. And finally, ~50% of the agents who don’t buy leads from you say that the leads are expensive and of low quality. This is a problem.

So, let’s get to the point. This all indicates that the future for Zillow looks… challenged. These challenges will begin to show up in the Total Addressable Market (TAM) for Zillow.

The William Blair survey indicated that the average agent spent $15,000 on marketing and lead generation. Let’s be generous and say EVERY one of the 2.8 million licensed agents, whether full-time or just holding a license, residential or commercial, spent the entire $15K on residential lead generation portals per year, that TAM would be around $42 billion. William Blair also found out that only 35% of those marketing dollars were spent on home search portals, so this brings the lead selling TAM down to about $14.7B.

Zillow’s 2023 full-year residential revenue was $1.45 billion so that would give them about a 9.9% market share in the leads generation business. Now remember, I was being VERY generous in how I calculated that TAM by including all licensed agents’ spending like they are crushing it in home sales.

Ok, but what if the NAR commission rules changes result in 20% (560,000) of licensed agents leaving the industry and average agent marketing spending going down to $12,000. Based on Zillow’s market share remaining the same, their annual residential revenue would drop to $929 million, a 36% decrease from FY2023 levels. (I won’t bore you with the calculation but trust me, I have an MBA!)

I am going to go out on a limb here and make a bold statement.

Zillow’s real residential lead-selling TAM will never be more than whatever their FY2024 residential revenue ends up being!

The Zillow 2023 residential revenue dropped 5% from 2022 and I think the organic revenue will plateau in 2024 and fall every year after 2024. That would put Zillow’s real residential TAM in the neighborhood of $1.5B, which would represent a 90% drop from $14.7B.

How could I be wrong? Well, I have an MBA so the math could be wrong. Zillow could pull off a strategic shift and monetize listing agents and home sellers – kind of like their well-funded, Super Bowl ad-running competitor CoStar. Buyer’s agents could rise from the ashes and soar again. Realtor.com could quit selling leads tomorrow leaving Zillow as the only place to buy leads at scale. Licensed agents could dramatically shift marketing spending to buy leads.

All of these are POSSIBLE but not very likely to happen in the near term… or ever for that matter. So, I am boldly predicting that 2024 will be the high-water mark for Zillow residential lead selling revenue.

SpringRamp Consulting Disclaimer:

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of any of the companies and organizations mentioned in the article, or of any platform that publishes this article. This article represents an opinion on the possible actions, activities, impact, and results of various companies and should not be considered statements of facts.

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