Hello, and welcome to Zillow Group's Third Quarter 2026 Financial Results Call. We ask that you please hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question-and-answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Brad, you may begin.
Thank you. Good afternoon, and welcome to Zillow Group's quarterly earnings call. Joining me today to discuss our results are Zillow Group CEO, Jeremy Wacksman, as well as COO and CFO , Jeremy Hofmann. During today's call, we will make forward-looking statements about our future performance and operating plans based on current expectations and assumptions. These statements are subject to risks and uncertainties, and we encourage you to consider the risk factors described in our SEC filings for additional information. We undertake no obligation to update these statements as a result of new information or future events, except as required by law. Please review the cautionary statement and additional information in our earnings release, which can be found on our investor relations website. This call is being broadcast on the internet and is available on our investor relations website. A recording of the call will be available later today.
During the call, we will discuss GAAP and non-GAAP measures, including adjusted net income, diluted adjusted net income per share, adjusted EBITDA, which we refer to as EBITDA, and adjusted free cash flow, which we refer to as free cash flow. We encourage you to read our shareholder letter and earnings release, which can be found on our investor relations website, as they contain important information about our GAAP and non-GAAP results, including reconciliations of historical non-GAAP financial measures. We will open the call with remarks, followed by live Q&A. With that, I will now turn the call over to Jeremy Wacksman.
Good afternoon, everyone, and thank you for joining us. Q3 put Zillow's durability on display. Housing conditions deteriorated sharply, but Zillow kept growing and outperforming, powered by our brand, audience, consumer engagement, value to partners, disciplined cost management, and strong growth levers across all parts of our well-diversified business. These advantages are driving our performance through an exceptionally difficult macro environment and position us to accelerate when conditions improve. Consumers and real estate agents are experiencing one of the toughest housing markets in a generation. Just since the beginning of Q3, mortgage rates have risen nearly 100 basis points, from mid 6% at the end of June to mid 7% by early October, among the steepest three-month rate increases since the 1980s. Against that backdrop, here is what Zillow delivered. Our Q3 total revenue was up 7% year-over-year to $724 million.
Rentals revenue was up 26% year over year to $220 million, driven by multifamily revenue. Our for-sale revenue was flat year over year, which included residential revenue decreasing 4% and mortgages revenue growing 32%, even as purchase mortgage origination volume for the industry declined 4%. Adjusting for the expected impact of our transition to Zillow Preferred, underlying for-sale revenue outperformed the purchase mortgage industry by 600 basis points. Our continued relative outperformance for more than three years now shows the strength of our underlying growth drivers. EBITDA landed within our expectations at $182 million, as we managed costs throughout the quarter, and EBITDA margin expanded by 70 basis points year over year to 25%. Zooming out from the near term, I want to focus your attention on the full story, how Zillow is defining the next era of real estate.
To understand our opportunity, it's important to understand that real estate is unlike other transactions. While personal AI agents are becoming more pervasive, often by making everyday life more efficient, canceling an unwanted subscription, scheduling an appointment, or taking another mundane task off someone's to-do list, home buying is fundamentally different from those use cases. Few decisions are as joyful or as high-stakes as choosing a home. People come to Zillow for both reasons. No one wants an AI agent to watch a movie or play a game for them, because the enjoyment is the point. Dreaming and searching for a home is similar. It's the fun part of the moving process that people want to do. It's also one of the most consequential parts, because home is where lives are built, where kids grow up, where people find comfort in good and hard times.
Finding a home isn't a chore to hand off to a robot. It's a milestone people want to live themselves. Housing is also complex and deeply personal. Consumers want to see all of their options and spend significant time exploring neighborhoods, comparing floor plans, understanding trade-offs, walking through a possible home virtually and in person, and picturing what daily life would feel like there. They want to go down the rabbit hole, and then when they're ready, they want to confidently make decisions and easily take the next big step. That is the experience Zillow is especially effective at delivering, which is why our brand is so beloved, our platform is so sticky, and our relationship with consumers endures across market cycles. Zillow's position with real estate consumers is stronger than ever.
According to Comscore, Zillow attracted 77% of average monthly unique visitors in the real estate category in Q3, an all-time high. Comscore also showed Zillow's unique visitors are up 1% year over year, even as higher rates pressured traffic to the category down 10%. About 80% of our traffic continues to come directly to Zillow rather than from third-party sources like search engines. Traffic from SEO, which is a much smaller channel for us, also held steady in Q3. Consumers continue to trust Zillow because, for 20 years, we have put more information, choice, and control in their hands as they navigate one of life's most emotionally and financially significant decisions. We have the most visited real estate platform, a deeply engaged audience, trusted professional partnerships, leading software and transaction services, and a diversified business that adds value for consumers across renting, buying, financing, and selling.
AI accelerates our ability to serve consumers and deepens our relationship with them. Zillow AI Mode brings conversational, personalized guidance into the Zillow experience people already know and trust, giving them more reasons to start and stay with Zillow. Consumers who use AI Mode engage more deeply than those who don't. They spend nearly three times as long on Zillow, run more searches, view more homes, and request more tours. Between March and September, more than 2.5 million people used AI Mode and asked 8.5 million questions, and more than half of those questions came outside traditional business hours, demonstrating the value of having personalized guidance available whenever consumers need it. We've seen this pattern time and again. When we crossed the chasm from desktop to mobile and put Zillow in people's pockets after the iPhone launched, they spent more time on Zillow.
We're seeing the same signals emerge with AI Mode, because dreaming about a home is the activity people create even more time for when they find efficiencies in other parts of their lives. People love to shop for real estate, and they love to do it with Zillow. Buyers spend two to three hours a week with us over about five months before they transact, and then for most, Zillow software and services power their transaction. The majority of residential real estate transactions in the U.S. run through our professional software. With Zillow's transaction infrastructure, our agentic AI does more than guide the shopping experience people love. It is an always-on, infinitely patient companion for consumers and professionals throughout the transaction itself. This strengthens the conviction we had when we launched AI Mode.
Combining Zillow's visual platform with an intelligent, always-on agentic companion will set the new standard for how people dream, shop, and transact real estate. We are pleased to announce that AI Mode is now available to 100% of our signed-in users, and we continue to see early signals of what is possible. With agentic AI embedded directly on Zillow, we can also make real estate professionals more productive, help them serve clients better, and convert more of the traffic from people already obsessing on Zillow every day into real-world transactions. We're using AI the same way inside the company, and it's evolving how Zillow's engineers work. They're shipping 60% more changes to production than they did in 2024, while quality has improved significantly. That pace is how we get new products and services into the hands of consumers and the professionals who serve them faster.
Now I'll dive into Zillow's durable growth drivers, starting with rentals. Most consumers rent a home at some point in their lives, some for the long term and others while they're saving up to buy. Zillow serves all types of renters, as well as the full gamut of housing providers, from the mom-and-pop investor or the homeowner who's decided to find a tenant instead of selling, to the manager of a large building with vacancies to fill. To provide a sense of the scale of this category, in 2025, more than 17 million U.S. households moved into a new rental, compared with 4.8 million existing and new homes sold, more than three and a half rental moves for every home purchase. Rentals now accounts for 30% of our total revenue, up from 21% two years ago.
Zillow Rentals is also now the first-choice brand for 43% of renters, more than twice the preference rate of the next closest brand. Diversifying into this space has brought us a large growth opportunity and made our business more robust. As mortgage rates were spiking, rental demand shot up nearly 20% year-over-year in September. Our rental strategy is to offer the broadest, most comprehensive inventory across single-family homes and large multifamily apartment buildings in an otherwise fragmented market, and to streamline the transaction experience for consumers and housing providers. In particular, our unique inventory of smaller long-tail properties, generally fewer than 25 units, is a strategic asset. We estimate single-family homes constitute more than half of all rental units in the market. We deepen the value of our long-tail marketplace by delivering a streamlined and connected experience that brings together applications, tenant screening, leases, and payments all in one place.
This gives landlords a simpler way to manage their rentals and efficiently reach qualified renters, and gives renters an easy path from search to lease. As more of the rental transaction happens through Zillow, we have more opportunities over time to generate revenue from the services around it. Our one-of-a-kind selection of long-tail listings from independent landlords and small property owners attracts a large audience of renters who prefer Zillow, which makes Zillow the place landlords and property management companies want to list their properties. More qualified demand delivers strong ROI for property managers of homes and apartments, and strong ROI brings more properties and advertising dollars to Zillow. That lets us keep improving the renter experience and driving revenue growth. You can see that marketplace strategy working in our results. More multifamily operators are voting with their wallets and choosing to advertise with Zillow Rentals.
A record 81,000 multifamily properties advertised on Zillow as of the end of Q3, up 17% year over year. Partners tell us Zillow delivers the best ROI in the category for their marketing spend, and they are choosing broader packages as a result. More properties and higher revenue per property drove multifamily revenue up 35% year over year in Q3. Multifamily property managers spend an estimated $10 billion a year on advertising, and Zillow is still only scratching the surface of that opportunity. As we continue to attract the largest rentals audience, deliver qualified demand, and help partners understand which advertising dollars produce leases, we expect more properties and more advertising dollars to move to Zillow.
Rentals is a core pillar for us, a scaled, durable marketplace delivering strong performance today with a clear path to more than $1 billion in annual revenue, and a substantial opportunity to keep growing across both multifamily and long-tail rentals well beyond that milestone. In for sale, our goal is to help more people turn the dream of home into reality using Zillow products, services, and partners. Zillow is uniquely positioned to deliver this through a great digital experience, comprehensive listings and rich media, deep consumer context and personalized guidance, convenient financing through Zillow Home Loans, and trusted top-tier professional partners who are equipped with innovative tools to serve clients better at every step. 70% of people who buy or sell a home in the U.S. are already active on Zillow. One in four buyers reaches out to connect with Zillow, either through touring, financing, or an agent connection.
This is both meaningful reach and a significant opportunity, as only a small fraction transact with Zillow today. Our strategy for growing our for-sale revenue category is to participate in more transactions and earn more revenue per transaction. We are reaching more consumers, helping more of them buy or sell with a preferred agent partner, and supporting the transaction with integrated financing, seller solutions, and software products. With Zillow Preferred, we turn more of the demand already on Zillow into successful transactions by working with some of the country's most productive real estate agents. These agents do steady business through market cycles and invest where they see proven ROI, with us. Partnering with top professionals gives Zillow consumers a better experience and gives us a stronger path to more transactions.
In Q3, 2/3 of buyer connections came to a Preferred agent partner in the integrated experience, up from about 1/3 a year ago. We are on track for Preferred to represent more than 75% of connections by year-end, and we expect to reach 100% in the first half of 2027. We accelerated the transition to Preferred because it offers a better model for consumers, agent partners, and Zillow. Partners pay us when a transaction closes, aligning our success with theirs. Preferred connections convert to closed transactions at a higher rate than non-preferred connections and generate 35% more revenue per connection for Zillow than our legacy advertising model did. Our work does not stop at making the connection.
By integrating financing through Zillow Home Loans, listing marketing, professional software, and transaction services, we help Preferred agent partners become more productive, respond faster, serve clients better, earn more business, and close more transactions. When our partners win, Zillow wins. With that in mind, our plan to reach 100% Preferred is just the beginning of the long-term for-sale story. We expect growth to continue to come from improving conversion, increasing adoption of Zillow Home Loans and other services, and helping partners serve all their clients, including those they connected with through Zillow and those they met another way. We further drive value for consumers and agents by offering financing through Zillow Home Loans. Most buyers need both an agent and a mortgage, and they want their experience with both to be as seamless as possible.
Zillow Home Loans purchase mortgage originations grew 53% in 2025, and we expect them to grow more than 50% again in 2026. We've been able to significantly grow originations despite a declining purchase mortgage market, thanks to three key growth levers: serving buyers a Preferred agent partner met through Zillow, serving their other clients, and serving buyers who seek out financing before they have an agent. Buyers who work with a Preferred agent partner and use Zillow Home Loans transact nearly twice the rate and close faster than those who work with a different lender. In markets where Zillow Home Loans and Zillow Preferred have been integrated the longest, Zillow Home Loans adoption rates are roughly 20%, giving us a clear roadmap for driving greater adoption across the country.
We are also making Zillow Home Loans a trusted lender for Preferred agent partners' entire book of business, not just for the clients they connect with through Zillow. For buyers who want to understand their budget and explore financing before choosing an agent, we are opening up more pathways to get a Zillow Home Loans verified preapproval before taking a tour and exploring homes in the physical world. AI Mode makes us even better at this. Financing and affordability are among the most common topics people ask AI Mode about, and those conversations create additional opportunities for Zillow to help buyers take concrete steps toward their next home. For two decades, Zillow has been the go-to platform for buyers. In more recent years, we have also built up a powerful suite of solutions for selling a home.
From a standing start a few years ago, we now expect the combination of Zillow Showcase, listing media, and sellers transacting with our agent partners to contribute more than $300 million to our 2026 revenue. For sellers who choose to pre-market their home, Zillow Preview reaches a broad audience, builds buyer interest, and provides consumer demand insights to inform the launch. We have more than 800 brokerage partnerships enabling Zillow Preview, and the listings are now shared with realtor.com. The majority of agents who have used Preview use it again on future listings. Preview is a specialized use case within a much broader listings marketing suite that helps homeowners get their listing seen and sold. Zillow Showcase helps a listing stand out with a proprietary immersive experience that includes 3D tours, interactive floor plans, and dynamic exterior views. Showcase is now on 5.4% of all new U.S. listings.
Agents who use Showcase on the majority of their listings win 35% more listings than peers who don't. Zillow is a clear leader in next-generation listings beyond Showcase as well. Our rich media is on nearly 12% of new for-sale listings nationwide, more than any other provider. Virtual Staging, once limited to Showcase listings, is now available more broadly on Zillow, and we are accelerating the pace of our innovation with remarkable new tools that give buyers a better sense of a home before visiting in person and empower professionals to market their listings more effectively. We're making instant floor plans easy to capture by simply holding up an iPhone and walking around, developing more immersive 3D tours, and turning existing listing photos into AI-generated videos without the agent or photographer having to capture any additional imagery.
By making richer listing content easier and more affordable to create at scale, Zillow is defining the future of listing marketing and setting the standard for what consumers will expect and demand from every listing. Underpinning the transaction is Zillow's professional software. Quietly and over decades, Zillow has built out the technology rails upon which the industry rides. ShowingTime enables in-person tours on more than 90% of all homes for sale in the country, and dotloop facilitates closings for nearly half of all real estate transactions nationwide. Follow Up Boss is the customer relationship management system of choice for the majority of the country's highest volume real estate teams, and it had about 141,000 monthly active users in Q3, up 16% year-over-year. We are developing agentic AI inside Follow Up Boss so agents can spend less time managing their pipelines and more time serving clients.
Our AI proactively surfaces the leads and conversations that most need attention and recommends next steps for the agents to approve. This agentic experience builds on the foundation of other popular AI-assisted Follow Up Boss features and moves our software beyond organizing information toward helping agents act on it, making for a more intelligent CRM experience that creates more opportunities to turn relationships into transactions. Follow Up Boss supports agents' daily work. Zillow Pro takes it to the next level. A membership gives agents a connected platform that lets them collaborate with all their clients directly on Zillow. Agents with a Zillow Pro membership see on average 15% greater transaction volume than similar agents without Zillow Pro. Individually, these are each valuable products. Connected, they make Zillow the operating system for modern real estate. Zillow wins because our advantages reinforce each other.
Deep consumer engagement gives us rich context that makes our products more useful. A more useful experience attracts more high-intent consumers and helps them become transaction-ready. More transaction-ready consumers make Zillow more valuable to real estate professionals, and partnering with the best real estate professionals and enabling them to serve their clients better through our products and services helps us power more transactions. Every transaction that runs through our infrastructure improves the experience for the next consumer. Those advantages have strengthened throughout every major technology shift in real estate. Zillow turned on the lights when home shopping moved online, put real estate in people's pockets when mobile took hold, and is now bringing intelligence and action together through agentic AI. We are building the faster, easier, and more affordable moving experience we know is possible. The next era of real estate is taking shape, and Zillow is leading the way.
I'll turn the call over to our COO and CFO, Jeremy Hofmann.
Thanks, Jeremy. Turning to our results. In Q3, we generated $724 million in revenue, up 7% year-over-year. EBITDA of $182 million resulted in expanding EBITDA margins by 70 basis points, despite the interest rate shock that occurred. Let me take you through the details of the quarter. Mortgage rates rose nearly 100 basis points from the start of Q3 into early Q4. That rapid rise in rates resulted in the residential real estate industry growing only 1% year-over-year in Q3, according to NAR. Affordability has a larger impact on mortgage buyers. As a result, we estimate that industry mortgage purchase origination volumes were down 4% for Q3, below our expectation for a low single-digit decline. We call out mortgage industry performance because a majority of Zillow buyers purchase their home with a mortgage.
Our for-sale revenue was flat year-over-year in Q3 at $489 million, 400 basis points stronger than the purchase mortgage industry. With the expected 200 basis point headwind as we shift to the Zillow Preferred monetization model, our underlying for-sale revenue outperformed the purchase mortgage industry by 600 basis points. Within the for-sale revenue category in Q3, residential revenue of $419 million was down 4% year-over-year. The decline was driven by weak housing demand and an estimated 600 basis point headwind from the impact of transitioning connections to our Zillow Preferred partners. Underlying residential revenue outperformed purchase mortgage origination volume for the industry as a whole by 600 basis points in Q3 when taking the headwind into consideration. This impact is consistent with our expectations we discussed last quarter.
Also within residential, Zillow Showcase, new construction, and our suite of agent software tools were positive contributors to revenue performance. Within the for-sale revenue category, mortgages revenue grew 32% year-over-year in Q3 to $70 million. This was below our outlook due to the mortgage rate shock, which caused lower conversion. Purchase loan origination volume grew 55% year-over-year in Q3 as we continued expanding the share of connections to our Zillow Preferred program. We are pleased that we continue to see double-digit customer adoption rates in Zillow Home Loans, with our oldest markets at approximately 20% adoption rates, demonstrating that our integrated experience is adding value for both consumers and real estate agents. Turning to rentals, Q3 revenue was $220 million, growing 26% year-over-year. This was primarily driven by our multifamily revenue, which was up 35% year-over-year in Q3.
Our value proposition continues to attract new multifamily property managers, with total properties growing to a record 81,000 in Q3, up 17% from a year ago. Additionally, our large volume of high-quality rental leads is delivering signed leases at a superior ROI. We are growing wallet share as we win new properties, and existing property managers continue to upgrade their advertising packages with us. Q3 EBITDA expenses were $542 million, up 6% year-over-year and better than our expectations of $560 million-$565 million, driven by recent restructuring and overall cost management. Fixed expenses, excluding one-time items, were down 8% year-over-year. We reported a net loss of $158 million. Excluding one-time items, adjusted net income was $124 million. Diluted adjusted net income per share was $0.55 compared to $0.44 in Q3 a year ago.
Year to date, we have generated $269 million of adjusted free cash flow. Share-based compensation expense was down 25% year-over-year during the quarter. We repurchased $20 million of our stock during Q3. Year to date, we have repurchased $846 million in shares, demonstrating conviction in our long-term opportunity. Our total outstanding shares were 226 million at the end of Q3, down from 240 million at the beginning of 2026. As of the end of September, we had approximately $1.1 billion remaining for future share purchases under our existing authorizations. We ended the quarter with cash and investments of $707 million and total liquidity of $1.2 billion. This strong liquidity position gives us flexibility on our financial priorities to invest in driving growth, maintain an adequate risk-based capital reserve, support flexibility for potential M&A, and continue to be opportunistic with share buybacks.
Turning to our outlook for Q4 2026. We expect total revenue of $635 million-$665 million, roughly flat year over year. Our revenue outlook includes our expectation for a decline in year-over-year mortgage industry purchase origination volumes of 10%-15%. This is down significantly from our prior industry expectation of mid-single digits decline due to the sharp increase in mortgage rates we saw at the end of Q3 and into the start of Q4. We see continued pressure on affordability having a larger impact on mortgage buyers than the overall market. In both for-sale and residential, we expect revenue to decline roughly 9%-15% year over year in Q4. We expect to end the year with more than 75% of our connections going to Zillow Preferred partners, which will result in increased seasonality and differences in revenue recognition timing between our residential and mortgages revenue.
As a result, we expect 400-500 basis points of headwind to for-sale revenue growth and 900-1,000 basis points of headwind to residential revenue growth, consistent with our prior expectations. When adjusting for the impact of the Zillow Preferred transition, we expect similar for-sale outperformance in Q4 to the 600 basis points relative underlying outperformance trend we saw in Q3 compared to the purchase mortgage industry. For mortgages, we expect revenue to decline low single digits year over year in Q4 at the midpoint of our outlook range. Within mortgages, we expect origination volume to be up high single digits year over year. We expect origination volume from the Zillow Preferred program to grow mid-20% year over year, offset by a decline in finance first volume due to higher mortgage rates.
As we've seen before, within a specific quarter, rate volatility tends to matter more than the absolute level of interest rates. As a result, we expect it will take some time to rebuild our mortgage funnel. In rentals, we expect Q4 revenue growth similar to the 26% year-over-year growth we had in Q3. In Q4, we expect EBITDA expenses of $530 million-$535 million and EBITDA of $100 million-$135 million, implying 18% margins at the midpoint. Our EBITDA expenses imply 5% growth year over year. Turning to the full year 2026, we expect to deliver approximately 10%-11% revenue growth, which includes approximately 30% growth in rentals revenue. We expect flat EBITDA margins, translating to EBITDA of $655 million-$690 million.
We expect our share-based compensation expense to be down more than 20% year over year, better than our previous expectation for down more than 15% year over year. For the full year, we expect the housing market to be flat and the purchase mortgage industry to be down mid-single digits. To close, we are pleased with our execution. We are delivering relative strength in our business and accelerating our integrated transaction strategy while demonstrating disciplined cost control and expanding margins in a challenging backdrop. With that, operator, we will open the line for questions.
Thank you. At this time, if you would like to ask a question, please click on the raise hand button, which can be found on the black bar at the bottom of your screen. When it is your turn, you will receive a message on your screen from the host allowing you to talk, and then you will hear your name called. Please accept, unmute your audio, and ask your question. We will wait just one moment to assemble the queue. We will take our first question from Ron Josey with Citi. Please unmute your line and ask your question.
Hi, this is James michael Sherman -Lewis on for Ron. Thank you for taking my questions. Two here, please. Jeremy, thank you for the insight into Zillow's strategic long-term growth drivers. Can you help us better understand the path ahead in translating these opportunities into improved financial performance and what that timeline might look like in context of a pressured housing macro? Second here, with AI Overviews evolving search and personal agents like Muse gaining adoption, acquisition channels are clearly changing across the internet. Are you seeing any changes in Zillow's traffic patterns, and how are you positioning Zillow here more broadly, particularly with Zillow AI mode now live?
Yep. Thanks, James. It is Jeremy Hofmann. I will take the first question, and then Jeremy, maybe you take the second one.
Yeah.
That sounds good. With respect to the longer-term growth drivers of the business, it has been the case for the last three, four years at this point that we have consistently outperformed the market, and we plan to continue to do so. In for sale, we have a few key growth levers. We are going to drive more transactions, more revenue per transaction, and both underpinned by our software and tools. To drive more transactions, it is really increasing conversion for buyers and engaging with a broader set of customers with Zillow Home Loans and with sellers. In terms of driving more revenue per transaction, it is really the integration of Zillow Preferred agents and Zillow Home Loans, and then our software and tools grow along the way.
Our software really helps agents convert more of their shared customers and then grow their entire businesses as well, and we are really pleased with what our software and tools are doing. With respect to Zillow Rentals, which is another key growth driver, multifamily is going to be the continued accelerator. Partners tell us we have the best ROI in the category, which really enables us to capture more of the multifamily advertising TAM, that $10 billion number that Jeremy referenced in the prepared remarks. That is really on the back of grow number of multifamily properties who are listed with us and then grow the revenue per property as the property managers upgrade their packages. There, we see a clear path to the billion-dollar-plus intermediate target in revenue with a long growth path beyond that, just given how good our ROI is versus other advertising sources.
Yeah. On AI and sort of how is AI evolving and how are we making use of it, I think you had a question specifically on traffic. I think I would start with, as agentic AI evolves and develops, we see the human experiences remaining human, and we see the technology helping humans get more efficient, both consumers and professionals. I talked about that a bit in my prepared remarks. The dreaming and shopping part is the part you want to do, and the transaction part is the part you need to do, and Zillow is the best place to do both those things.
Our ability to make the buyer and seller's experience better at both of those things, and then our ability to make the professional's job easier so they can serve the customer better is where we are focused and why we are so confident in the strategy. Just look at a couple examples. I mean, Zillow AI mode, still really early, and we have just turned it to 100% of our signed-in users, but the couple million people who we have gotten to use it, we see deeper engagement with, right? We see strong correlations to more transaction-ready customers, run more searches, view more homes, request more tours, and they are asking questions outside of business hours, right? Half the conversations occur when someone would not be around to answer them. So having this infinitely patient, always-on personalized companion, it is more time spent.
It just reinforces that when you give buyers and sellers the ability to be more engaged and more empowered, they take that, and then they need help more, and then you need the professional to be able to help them on their terms. That is why we are building agentic AI into our software products, right? So Follow Up Boss, that CRM system for the top agents, 114,000 agents using that platform, making them better at their jobs by starting to build the agent's agent, right? The ability to suggest and ultimately help them get their jobs done faster, predict what they need to do next, and eventually help them take those next steps. We see AI as accelerating our strategy, and we are seeing that play out across consumer and professional. Of course, we are also using it to evolve how we work as Zillow employees.
I mean, we're not really seeing any impact yet. We're always going to lean into the new doors. We've been doing that with platforms, testing and piloting and integrating with the horizontals, and we've always done that. We did that with OpenAI, and we've done that with Gemini, and now with Anthropic, and we'll keep iterating and exploring because those are just new pathways for customers to find our platform. We're not really seeing any meaningful traffic yet. I mean, you see that in our traffic results. The category of traffic is down 10% year-over-year, and we're basically flat in that category. That's growing share, right? That's the strength of our brand. That's the fact that so much of our traffic comes direct to us. We're not seeing much of a shift yet.
If we do find consumers, find new doorways into us, we'll be there for them, and we'll build the great experiences to help attract them.
Appreciate the color. Thank you both.
Our next question comes from Brad Erickson with RBC Capital Markets. You may now unmute your line and ask your question.
Hey, guys. Thanks for taking the questions. I had a couple. First, a little bit of a hard one. The Q4 mortgage guide came in pretty soft. I appreciate some of the headwinds you called out in your remarks, Jeremy, but still coming in a lot closer to the industry growth rate-wise than you'd been running previously. Has something changed structurally for how you go to market or anything else you'd want to expand on that mortgage weakness you're seeing in Q4? Then I have a follow-up.
Yep. Brad, I'll take it, and thanks for the question. Macro is worse than we expected, so I'd say that was the primary driver of the softness in mortgage. What I'd call out for you is, no, nothing structurally has changed. One place to point you is, even in Q4, we see the opportunity to grow the Zillow Preferred to ZHL piece of our mortgage business in the mid-20% range versus a purchase market that we think is going to decline 10%-15%. So, we see pretty substantial outperformance opportunity in Q4 with that channel. Where we really saw pipelines get hurt even further was in the finance first. So, folks that come to Zillow to get financing advice and get pre-approved before they meet an agent, that really fell off in Q3, and that harms our pipeline for Q4.
Part of the story there is inevitably when you have a rate shock like we did, that volatility really puts buyers on the sidelines. So, that's what we're seeing, and it'll take some time to grow pipelines back. But when we step back, we see a long runway ahead for growth. We'll grow ZHL over 50% this year. We grew it 53% last year, and we just see a big opportunity to be one of the biggest purchase lenders over time, just given the strategy that we're going after. So, it's nothing structural, but no question that rates impacted both Q3 and the pipeline for Q4.
Yeah. Maybe just to add there, I mean, I think if you step back to why are we so confident in mortgage growth, and I think why Jeremy said nothing changes structurally, it's the integrated strategy. I mean, 80% of buyers need both the mortgage and the agent. They want that as a one-stop shop. When we can offer that as an integrated experience, that's what they're choosing. I think Jeremy pointed you to a couple stats, that double-digit adoption rates across Zillow Preferred and 20% adoption in our most mature markets, that's a huge leg of growth for mortgage. It's why purchase mortgage revenue for us is outgrowing the category, even with the category declining. It's why we expect to continue to grow.
There's a long runway of mortgage growth, even as we have to navigate these rate shocks that hit finance first and, frankly, hit the mortgage market overall.
Got it. Then just to follow up, I think Google's kind of expanded from a mobile listings perspective through a partner here lately. Just curious to get your thoughts on that. What do your conversations with Google sound like in terms of their aspirations for either partnering here in this end market or perhaps competing a bit more? Thanks.
Yeah, I mean, on the Google, I think you're referring to the Local Services Ads product. We're still not really seeing any impact from that. I think you're going to always see ad unit evolution, and having this Local Services Ads come to the real estate category amongst others, it's a place for anyone who's buying search engine marketing to buy this ad product. The fact that 80% of our traffic is direct to us and only a few percent comes from what would be sponsored search or SEM advertising, it's why you don't see us have much of an impact. It's just a very different product and business model. There's lots of places on the internet to go buy search ads. It's very different than a Preferred connection and an integrated transaction and helping agents grow their business that way.
We haven't seen any impact from it today, even though it's supposedly live nationwide. We continue to not see any impact, and it's just a little different from our strategy.
Understood. Thanks.
Our next question comes from Tom Champion with Piper Sandler. You may now unmute your audio and ask your question.
Great. Good afternoon, guys. Jeremy Wacksman, could you just give us the update on recent litigation? What is the latest there? Do you feel like you are kind of over the hump? For Jeremy Hofmann, as COO, I am sure you are in the weeds of this Preferred transition every single day and watching it very closely. I am just kind of curious if you could talk about it a little bit, and the progress, and whether it is going kind of better, worse, in line with your expectation a quarter ago. Thanks, guys.
Yeah, I will add the first and hop you into the second. I mean, on legal, we are pleased to have resolved a few matters this year, especially ones that had kind of outsized one-time costs. We expect legal costs to be more normalized from Q4 on. I think we have been pretty consistent and transparent to the degree we could be that we did not expect these cases to impact business. I think as you are seeing them resolve, get settled, move on, you are seeing that come to light. They are not impacting our business, our ability to grow, or anything structural in our strategy. Being able to move on from them is helpful to just clean things up and stay focused.
Yeah, Tom, I'd echo what Jeremy said. I'd also say Q4 costs for legal are now normalized as well versus more what we would expect in a more regular environment. Just flagging that as well. On the preferred front, the short answer is the transition's going well. We're seeing partners convert over from MBP into Zillow Preferred at the rates we want to see them. We feel confident that we can transition the entire business by basically the end of Q1 into early Q2 of 2027, where we're going to be at 100% of our connections are in Zillow Preferred. That's because we feel good that we have the right demand and the right supply, for that matter, across the country, and the right agents to be working with our consumers. That's going well and continues to go well. We're on track.
With respect to why we feel so good about the business model overall, we just view it to be a better business model with a growth opportunity well beyond what we saw in the ad-based model. We've been consistent there. Our perspective was the ad-based model, agents paid us upfront for leads, and then after that, it was good luck and good riddance, whereas Zillow Preferred aligns the incentives between the consumer, the real estate agent, and Zillow Group, and that really helps us drive durable growth. Why we're seeing better revenue per connection is really the combination of the ability to grow transactions, grow adjacent services, and then grow our software and listings marketing suite with those Zillow Preferred partners who are so tightly integrated with us to adopt our tools. That's why we like it so much.
That's why we're seeing the revenue per connection lift and why we're rushing as fast as we can to get to 100%.
Thank you, guys.
Our next question comes from Ryan McKeveny with Zelman. You may now unmute your audio and ask your question.
Great. Thank you very much. Wanted to ask on the expense side. Adjusted EBITDA expenses were up 5%, and fixed expenses were down 8% year over year. I haven't run the math, but obviously variable expenses growing. Q4, I think it was 5% or 6% growth in adjusted expenses. I am just trying to think through where we are in the cycle of kind of fixed costs either normalizing out or continuing to potentially move lower. I know in the past you have talked about the variable expense moving closer to revenue. How are you thinking about that today, especially with obviously a lot of macro headwinds and just industry-wide revenue headwinds? If you can speak to that fixed versus variable split, that would be helpful. Thank you.
Yeah, I will take that one. Thanks, Ryan. Our framework for cost has been pretty consistent, which is leverage our fixed costs, manage the variable cost commensurate with revenue, and then invest in advertising opportunistically. On the fixed cost front, we have done well this year and continue to be really focused there. I think that expectation you should pull into 2027 as well, which is basically grow with inflation and look to fight inflation where we can. We will plan to do that. From a variable cost perspective, we are starting to trend more in line with revenue. That is pacing well throughout the course of the second half of the year, and that is what allows us to grow the cost base at that 5% level for Q4, which I think sets us up well for 2027 as well.
Ryan, the one thing I would call out is cost grew, call it 5%, 6% in Q3, and then we called out fixed expenses down 8% overall. That fixed cost base, that is across everything, including stock-based comp, so it is not just EBITDA. That may be where the disconnect is. Our stock-based comp was down, I think, 25% year over year in the quarter, so that may be the delta you are thinking about.
Got it. Perfect. Thank you for that. I guess just one more. In terms of loan officer headcount or capacity, I guess, are you in a place to fulfill the demand that's coming from Zillow Preferred, as you make that full acceleration to 100%? I assume you're still out there hiring and expanding loan officer count, but to the extent that with Zillow Preferred comes more mortgage business, how do you feel about your capacity today, and should we expect there's further hiring into 2027 as an example? Thank you.
Yeah. We are hiring. We're continuing to hire just to make sure that we're able to fulfill that demand. Such a key part of this strategy is making sure that the Zillow Home Loans loan officer and the Zillow Preferred agent build a mutually beneficial relationship. It is really a mutually, you're working with the customer, and the customer's expecting to show up as like one team, right? So, that relationship is really important, and we really only get one shot at doing well by our real estate agent. So we have been methodical in that, and we have to make sure we're staffed well to be able to satiate the demand. From there, once we get to 100% Zillow Preferred, we will continue to hire because we expect to drive more transactions, but that will be in line or more in line with revenue growth.
I would just continue to believe that we will be hiring more loan officers, and then our job is to ensure that they're doing a great job with respect to our agent partners and our consumers, and also finding every which way to make them as productive as possible.
Great. Thank you.
Our next question comes from Nick Jones with BNP Paribas. You may now unmute your line and ask your question.
Great. Thanks for taking the questions here. I guess maybe taking a step back and just thinking about kind of prevailing industry trends. I mean, are there any mile markers or dynamics we should be considering? It seems like buyers aren't stepping in. I mean, historically, how should we think about how this may resolve as sellers kind of keep coming to the market, but there aren't any buyers? I think we've seen prices come down, so is there reversal here down the road potentially faster than anticipated? Thanks.
Yeah. Hof, I can take that. I think forecasting macro into the future is tough right now. I think what Jeremy said earlier, purchase mortgage market down 4% Q3, and we think down 10%-15% in Q4, and affordability challenged buyers means less buyers, and that's what you're seeing right now. You're seeing observed rental demand up, right? I mean, observed rental demand in Q3 up nearly 20% year over year. I think your question kind of hopefully implying a coiled spring will uncoil faster. I think it's hard to know or to see, just given we haven't been here before. Rate shock versus rate levels, as Jeremy talked about, is probably a good way to think about it. The shock is probably what caused the shock caused the drop more than the fact that rates are actually at a seven handle.
I think that's where we're going to be next quarter, and that's where we're going to be heading into 2027. Can't really forecast 2027 yet. I can tell you our job is to grow faster than the industry, and we've done that consistently for three years now, and we expect to outgrow whatever the industry is doing going forward. While the housing market is clearly softening, and we think it's prudent to not assume it gets better, we'll control what we can control on the cost side, and we'll go grow the company and take share as a result.
Yeah. Nick, I would say-
Nick. Okay.
Sorry, just one other thing I would say is, like, as a result of what Jeremy said, our expectation is we're just dragging right on macro going into Q4 into 2027. It's not obvious to us how things necessarily improve, so we're going to plan as if it's going to be like that. Our job is just keep driving on the underlying structural growth drivers we have. We're also fortunate in that the business has diversified pretty rapidly over the last four or five years, where 40% of the revenue is now coming from Zillow Rentals and software, which isn't as rate dependent. So that gives us good ballast alongside the ability to grow share in the rest of the for-sale business and control costs along the way.
Then maybe one quick follow-up on that. I mean, is there any change in user behavior? I think maybe one of the stats was 60% of folks looking at rentals also look to maybe buy a home. Is that consistent? Or maybe there's less people looking for pre-approvals. I guess maybe that's what's happening. But I guess any indication in the user behavior from what we saw maybe earlier in the year versus today? Thank you.
Yeah. Not really. The demand is there. I mean, buyers want to buy. It is why when you saw rates drop earlier in the year, you saw a brief relief in the market. You are definitely seeing the folks who are dual tracking. They have always been dual tracking. For a long time, the majority of our buyers dual track, and so that being elevated, you see in the rental demand, right? Rental demand up nearly 20% in Q3 is a result of that. But structurally, the buyers who are there and the seller buyers who want to sell and buy are there. They are just either stuck on the sideline, forced to be stuck on the sideline, or scared by the rate shock.
Yeah. I think, Nick, that is why we love the Zillow Rentals business so much too, is when rates do what they do, rental demand is there, and we have obviously been able to build a really nice business in Zillow Rentals, and we see a long path ahead to growth just given the ROI that we are delivering to these property management companies. That is the thing that also gives us a lot of comfort, is we have really diversified the business, and Zillow Rentals can be a star even in a rate environment like we are in right now.
Thank you both.
Our next question comes from John Colantuoni with Jefferies. You may now unmute your audio and ask your question.
Great. Thanks for taking my questions. I wanted to ask about the Zillow Preferred rollout. First up, just a clarification. Is your plan to expand Zillow Preferred to 100% of partners by the first half of 2027 an acceleration from your prior plans from last quarter? You did not provide a timeline for that full expansion last quarter and had suggested the headwind from the rollout would start moderating the first half of next year. If you are in fact accelerating the rollout plans, can you talk a bit about what you observed in the past three months that is giving you the confidence to move a little bit faster there and how we should think about the impact of that transition next year relative to your expectations you provided last quarter? Thanks.
Yep. Thanks, John. No change, actually. We announced on the last call that we were going to accelerate to Zillow Preferred. We said 75% plus by the end of this year. We are on track to do that, and then transition the entire business over by the first half of next year, which is why you start to feel the headwinds dissipate in the second half of the year. I would not think of that as any change, and I would think of it as we are doing what we said we were going to do, and we are pleased with the results of what the Zillow Preferred rollout looks like three months later. So, no difference there.
Okay, great. Then maybe I just squeeze another one in. You talked to getting to 20% attachment rates in some of your older markets on ZHL. Talk a little bit about what helped drive that, and if the performance that you are seeing in some of the older markets is potentially how you can think about the longer-term opportunity as you continue to improve capabilities there. Thanks.
Yeah. It is a good question. I think, I am sure you and others have the, how do you model adoption long-term? And we are working on that too. We like both signals, the fact that we are at double-digit adoption rates across all of Zillow Preferred, and obviously there is a distribution there, and so your most mature markets, you see 20% as ways to think about where are we today. I think where could it go is the question you are asking, and that is hard to forecast. We obviously think there is upside from here.
The reason we get higher adoption is, as Jeremy said earlier, we hire great loan officers, we introduce them to Preferred agents, they have a good experience on a transaction, and they earn their way into the consideration set for that agent, so that when Zillow customers want that, when they get pre-approved, when they are interested in the integrated transaction, both parties are working together. Our ability to do that more and more for more of our customers, we feel confident in.
We are not putting a number on what that could be, because there are lots of reasons you would choose something else, but we feel like there is more upside in the future than we have today, which is great, because we also feel like we can grow Zillow Home Loans just doing what we are doing today through Preferred, and then get better at doing this for more agents and more loan officer connections that we make over time.
Yeah. John, the one other thing I would layer on top of that is, part of the reason we are seeing the higher adoption rates in the older markets is pretty logical in that the loan officer and agent relationships take time, right? That mutual trust gets built over time working with consumers together and doing a great job for them. That can take some time. We are pleased that we are seeing higher levels of adoption, because it does allow us to dream of what could be as time goes on, but it is definitely too early to say that is definitely where every market is going to go.
Our last question comes from Nikhil Devnani with Bernstein. You may now unmute your audio and ask your question.
Thanks for taking my question. Maybe a similar theme. Could you elaborate a little bit on what you've seen in your more mature Preferred markets from a share spread perspective? I know there's a lot of revenue dynamics going on in the business right now as you transition to Preferred, so if we sort of think about the mature cohort markets as really a look through to what the business could be doing or should be doing when we're done with this transition.
Speaking with you all next quarter.
Thank you for joining Zillow Group's Third Quarter 2026 Financial Results Call. This concludes today's conference call. You may now disconnect.