Zillow Group (Z) had a rough Thursday. The real estate technology company reported weaker-than-expected third-quarter results and trimmed its full-year revenue outlook, and investors responded by knocking the stock down 9.38% to $30.72 by the time of publication.

The numbers themselves were not pretty. Adjusted earnings came in at 55 cents per share, missing Wall Street's estimate of 67 cents. Revenue rose 7% year over year to $724 million, but that was still short of the $773.04 million consensus. Residential revenue actually declined 4%, while mortgage revenue jumped 32% and rentals climbed 26%.

Then came the guidance. Zillow told investors to expect fourth-quarter revenue of $635 million to $665 million, well below the $740.76 million analysts were looking for. For the full year 2026, the company now sees revenue of $2.84 billion to $2.87 billion, down from its previous range of $2.92 billion to $2.96 billion.

Needham Says The Housing Market Is Getting Worse, Not Better

Needham analyst Bernie McTernan was not surprised by the weakness, but he was clearly concerned about the direction of things. He reiterated a Hold rating on Zillow and cut his earnings estimates, pointing to worsening housing market conditions and rising mortgage rates.

The macro backdrop, in his view, was worse than expected. Mortgage rates climbed 100 basis points during the third quarter, reaching the mid-7% range at their peak. McTernan described that move as a two-standard-deviation event, which is analyst-speak for "this was a big, unusual shock."

As a result, Needham now expects the housing market to decline 12.5% in the fourth quarter, compared with its previous forecast of an 8.5% decline. That is a meaningful downgrade in a hurry.

The estimate cuts flowed through to the bottom line. Needham lowered its 2026 adjusted EBITDA estimate to $494.1 million from $730.1 million. It also reduced its 2027 forecast to $751 million from $893.4 million. McTernan noted that Zillow's third-quarter adjusted EBITDA came in 7% below Needham's expectations due to weaker revenue and margins.

The Preferred Model Transition: Long-Term Hope, Near-Term Risk

Here is where the story gets a little more interesting. Despite all the near-term gloom, Needham remains optimistic about Zillow's transition from its Market-Based Pricing model to its Preferred model. Zillow expects 75% of customer connections to move through Preferred by year-end, and the company aims to complete the transition by the end of the first quarter or early in the second quarter of 2027.

Needham believes the shift could improve revenue generated per connection. That is the bull case: better monetization of the traffic Zillow already has.

But there is a catch. The transition also increases Zillow's exposure to seasonal housing market fluctuations. In other words, the new model may be more efficient, but it also makes the company more sensitive to the same forces that are currently battering the housing market.

McTernan acknowledged that falling earnings estimates make it difficult to determine whether expectations have reached a bottom, despite the stock's inexpensive valuation. That is a polite way of saying: the stock looks cheap, but it might look cheap for a reason.

For now, Zillow is caught between a housing market that is weakening faster than expected and a business model transition that holds promise but adds risk. Wall Street is not ready to call the bottom, and Thursday's price action suggests investors are not either.