The housing market may be sluggish, but there's plenty of innovation in real estate technology, says KBW fintech analyst Ryan Tomasello. By Shaina Mishkin

The U.S. housing market has been stagnant for several years, plagued by high mortgage rates and affordability problems. There's nothing sleepy, however, about the market for technology-driven housing-services companies, which now dominate the market for listings, information, and property management. From megamergers to mounting lawsuits to artificial-intelligence innovation, this subset of the housing sector has it all.

If you aren't buying or selling a house, or working in the real estate industry, digital real estate companies such as Zillow Group, Rocket Cos., and CoStar Group can be hard to understand. But not for Ryan Tomasello, an analyst at KBW who leads the firm's coverage of financial-technology software and real estate technology. Back in 2023, industry insiders and investors turned to "Commission Impossible," a report co-authored by Tomasello and colleagues, to understand the implications of a potential guilty verdict in a lawsuit charging the National Association of Realtors with inflating commissions. Such a verdict followed shortly thereafter.

Barron's recently spoke with Tomasello to get a read on the latest upheaval in the digital real estate market, the outlook for more mergers and acquisitions, and his view of the most prominent stocks. An edited version of the conversation follows.

Barron's: Many parts of the housing-services industry, from brokerages to digital listing providers, have been undergoing transformation. Which recent developments do you consider most consequential?

Ryan Tomasello: The industry is still clawing its way out of the depths of a very difficult housing cycle. When there is a lack of housing transactions and [sales] commissions to eat, these companies start eating one another. You can see that in the war [among brokerages and between brokerages and listing services] around whether to permit private listings, in all the mergers-and-acquisitions activity in the industry, and in challenges to incumbents such as portals [digital real estate marketplaces such as Zillow Group].

The most meaningful development has been [the merger announced between] Compass and Anywhere Real Estate, whose brands include Coldwell Banker, Sotheby's International Realty, and the Corcoran Group. Assuming it wins regulatory approval, the deal is set to create a giant in the real estate brokerage industry. Not only will this create a huge market-share leader, but Compass also has been the most disruptive player in the brokerage business.

The deal will give Compass a lot of leverage, and could have downstream effects in terms of catalyzing additional consolidation as other brokerages aim to grow their share inorganically.

Speaking of M&A, Rocket's purchase of Mr. Cooper, a mortgage company, and Redfin, a real estate brokerage, earlier this year will create a housing-services giant to compete with vertically integrated companies such as Zillow and CoStar's Homes.com, another real estate search site. What is behind the deal, and who will come out on top?

It's a battle for control of data and information. Each company has its own strategy.

Zillow's overarching strategy is to narrow the gap between its audience share in home search and the share of transactions it monetizes. Beyond just serving as the platform through which a home shopper is connecting with an agent, Zillow is aiming to build an array of other services to help make that entire transaction process more seamless and vertically integrated.

Rocket is also focused on creating a simpler, vertically integrated experience for home buyers. Homes.com is focused on the listing-agent seller side of the business. The question is whether these companies can succeed in driving down the friction costs involved in transactions. It still is costly for a borrower to get a mortgage. Commissions are still high, relative to global standards. And there still are a number of other fees and costs for things like title insurance and home insurance.

Combining home search and mortgage seems like a natural way to leverage economies of scale to reduce pricing. That seems to be the strategy that Rocket is pitching as part of its tie-up with Redfin and Mr. Cooper.

Given how large the market is, and how fragmented it is across different revenue streams, especially mortgage, there can be room for multiple winners here. Rocket's entrance into home search isn't a death sentence for peers, but it is a meaningful change. Yet, I wouldn't dismiss the value and levers that incumbents such as Zillow have.

You rate CoStar's shares Outperform, with a $100 price target, implying about 25% upside. What will drive the shares higher?

The majority of CoStar's value is still tied to its core commercial information and its multifamily marketplace, Apartments.com. For CoStar, [the Outperform rating] reflects our expectation that the underlying recovery in the company's sales environment will continue.

In the past four-plus years, CoStar has focused attention on building out its Homes.com strategy. The launch of that program led to a lot of distraction and pulled attention away from the company's core business. As a result, growth stalled across the rest of the business. Now that the Homes.com strategy has matured, the company has refocused on the rest of the business. That should drive strong sales and propel revenue growth back to historical levels [about 20%].

CoStar's Homes.com strategy is focused on providing promotional advertising for home sellers and the listing agent. Thus far, investors haven't ascribed much value to the business -- or, if anything, negative value. The Homes.com business is still a potential upside driver. We're not baking in any value for Homes.com in our valuation. It's all gravy, as we say, if it ends up working.

You currently rate Zillow Market Perform. Why?

On the one hand, Zillow is the strongest brand in home search, but there are risks tied to competition. The stock is sensitive to fluctuations in housing sentiment. The trajectory of the recovery in existing-home sales will be one of the main drivers of the stock from here.

Zillow's earnings profile is cyclically depressed because of the housing market. [Zillow's net loss narrowed to 48 cents a share last year.] The stock, at a recent $76, is trading for 55 times free cash flow, above its historical average, which makes sense because home sales are running 30% below normal levels and approximately 60% to 70% of Zillow's revenue is strongly correlated to existing-home sales. But it also tells us the company is already getting some credit for an eventual recovery in housing.

Like Zillow, Rocket commands a significant premium to more-traditional mortgage companies. [The stock trades for 25 times expected 12-month earnings.] Investors are willing to ascribe value to the longer-term optionality that comes with its vertical integration strategy and its leveraging of technology to grow market share.

Our view is that Rocket [which KBW's mortgage finance analyst rates Market Perform] has the building blocks to create a pretty interesting mousetrap in the direct-to-consumer mortgage business. Mr. Cooper is a meaningful asset in that endeavor.

Redfin gives it an asset that starts to make Rocket look more like Zillow, in terms of integrating home search and services with a mortgage business. Rocket is approaching that from one end of the spectrum, leveraging its strength in mortgage, and Zillow is approaching it from the other end, with its strength in home search. That plays into the competitive dynamic.

What will matter most for investors in these companies in the coming year?

The macroeconomic backdrop will remain front and center, both in residential and commercial real estate. There is more uncertainty on the residential side. Transaction activity continues to bounce along at unusually low levels, with roughly four million existing-home sales for the third year in a row.

The commercial real estate market has seen more green shoots. Investors will be looking for the continuation of that recovery and any signs of a potential recovery on the residential side.

There has been a lot of scrutiny of the health of the consumer. The market is hoping for lower interest rates to unlock more residential activity, but if that lower-rate environment coincides with a credit cycle that hits the consumer, that wouldn't be the scenario investors are hoping for.

You recently upgraded AppFolio, which operates a property-management software platform, to Outperform. What is driving your optimism?

The stock has underperformed the market significantly. [Shares are down almost 2% year to date.] AI disruption fears have hit a number of software companies. With regard to AppFolio, investors have thrown the baby out with the bathwater.

In our view, AppFolio is set to become an AI winner, given the investment it has made to develop AI-native products. The return on investment that [customers are] getting in terms of the reduction in the number of days it takes to lease a unit, or the hours that property-management staff are saving every week, is impressive.

The company has a number of products coming to market that are set to improve its growth. That seems underappreciated by investors. The stock has underperformed our benchmark, a blend of market indexes and software peers, by 30% since the end of July.

What else is AI, or fear of AI, disrupting in the real estate space?

AI is top of mind for investors we speak with in every company we cover. AI disruption fears have been a meaningful overhang on CoStar's stock. I would encourage people to be discerning in a complex category like real estate, where there are a lot of barriers to entry.

Investors are far more focused on the disruptive risk from AI than the upside opportunities it could offer. ChatGPT, for instance, isn't going to have the advantage of all of the data that incumbent players in real estate services might have from years, if not decades, of customer interactions and transaction activity.

Think about how much data CoStar gathers in terms of rental-search behavior on Apartments.com. The question is: Can these companies harness the power of that data? [That] isn't easy to do.

What are the big themes in the rental market?

The housing market is much more sensitive to interest rates than the rental market. Both industries are plagued by undersupply, although the rental market has gone through a period of new construction that will get absorbed.

In the rental market, you don't have the commoditization of listings provided by the MLS as you do in the for-sale market. [The MLS, or multiple listing service, is a national network of local real estate listing databases that agents use to share information.] Companies such as Zillow Rentals and CoStar's Apartments.com have been successful in democratizing access to listings by aggregating the supply in one location.

Thanks, Ryan.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com

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October 31, 2025 21:30 ET (01:30 GMT)

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