Three reasons why Zillow's move into mortgages matters

Is Zillow on its way to becoming the Amazon of housing? It's been a busy couple of years for the real estate and rental marketplace, which recently expanded into the home selling business with the launch of its "Zillow Instant Offers" program, and, in August, announced the acquisition of Mortgage Lenders of America. The moves are part of the company's goal of expanding beyond simple real estate listings and valuation data to "serve the full cycle of owning and living in a home."

Skeptics have warned that Zillow will face an uphill battle. Unlike Amazon, which has been on an equally ambitious journey to reinvent retail, Zillow is operating in the notoriously cloistered world of residential real estate, where many — even Google — have tried and failed to disrupt the status quo. It's not an easy business, and incumbents still have an edge when it comes to navigating the labyrinth of local contacts, entrenched relationships, and proven business models. But, the world is changing.

The internet has become the top of the sales funnel

According to Zillow's latest earnings release, more than 175 million average monthly unique users accessed Zillow Group brands' mobile apps and websites during the first quarter of 2018, an increase of 5% year-over-year. That number is only getting bigger.

According to the J.D. Power 2018 Home Buyer/Seller Satisfaction Study, more than 80% of consumers began their home buying process online before they had an agent. By far, the most frequently mentioned website that was visited was Zillow. Similarly, the National Association of Realtors Real Estate in a Digital Age report finds that 95% of homebuyers searched websites before buying a home. That number jumps to 99% among the millennial generation.

In short, almost everyone starts shopping online, and a vast majority are going to Zillow. So in many respects, they are at the top of the sales funnel for home lending transactions.

Referral mechanism ripe for disruption

One of the sacred truths of the traditional real estate business model is the trusted advisor role that Realtors play in various phases in the home buying and selling journey. According to our study, more than 50% of buyers said they received a mortgage lender recommendation from their agent. Out of that group, roughly 37% of first-time buyers and 28% for repeat buyers used that recommendation. We see similar results in the J.D. Power Primary Mortgage Origination Study with first-time buyers in particular indicating that referrals from a real estate agent are one of the top influences in their lender choice.

However, these same consumers also indicate that they are using Zillow (59% of all purchase customers and 67% of first-time buyers). If that referral network is disrupted by Zillow engaging in an initial lending discussion at the onset of the process, it is conceivable to think that they could set themselves up as their own referral engine.

Consumers — particularly younger ones — also appear to be much less reliant on using traditional financial brands. According to the 2017 Accenture Financial Services Report, 50% of millennial American consumers say they would consider banking with Google or Amazon. As customer behaviors and brand preferences continue to evolve, the Realtor's role as trusted advisor could change.

Home shoppers don't really like shopping around for mortgages

Homebuyers tend to do a fairly limited amount of comparison shopping when it comes to mortgage lenders. According to our data, roughly one-third of homebuyers receive only one quote and nearly two-thirds receive no more than two mortgage quotes when buying a home. As we've seen with the advertising blitzes sponsored by digital mortgage lenders in recent years, simply getting homebuyers' attention and getting them to fill out an application is half the battle. Once they are in the door, mortgage customers are likely to stay put.

If the vast majority of consumers are beginning the home shopping process independently online and a large portion of that population are going to Zillow it means that they have the first crack at influencing consumers. Recognizing that a large percentage of homebuyers are doing a fairly limited amount of shopping for financing then you can see the potential impact of being part of the consideration set from the get go.

While it is too early to know exactly how things play out, you can start to imagine the potential implications. Thinking about a basic purchase funnel the math becomes very powerful. If 80% of all purchase customers start online (90% for younger borrowers) — and, based on what we see in our Primary Mortgage Origination study, let's assume that 50% of that group is visiting Zillow — that means they are starting with 40% of all the purchase borrowers engaging with them online in some form or fashion. If we then assume that they are successful at capturing mindshare of 5% of this group to the point that they are able to win their mortgage business that would mean they'd have 2% of all purchase loans and would likely make them a top 20 lender in the United States.

There are lots of unknowns here and it still unclear what this all could mean down the line. That said, it is hard to ignore the potential effect that "Zillow Mortgage" could have on the market in the future.