Zillow Just Painted a Grim Outlook for the Housing Market. Here Are 3 Beaten-Down Stocks to Buy Anyway.

Housing demand remains under pressure from high mortgage rates and elevated home prices, while U.S. housing starts have flatlined and existing home sales are near multi-decade lows. Zillow issued weak guidance for a flat housing market in the second half, though it still posted 18% revenue growth and remained profitable. The article highlights Home Depot and Sherwin-Williams as housing-linked stocks with dividend support and recovery potential if the market improves.

Analysis

The key second-order read-through is that housing weakness is no longer just a mortgage-rate story; it is turning into a utilization problem for the whole residential ecosystem. When turnover is suppressed for multiple quarters, the pain migrates from transaction-sensitive platforms to anything tied to discretionary “make the house better” spend, but the severity differs: marketplace/software models can preserve margins, while product-heavy retailers absorb the volume hit immediately.

Zillow is the highest-beta expression of any eventual housing inflection, but the asymmetry is poor near-term because its monetization still depends on transaction velocity and agent spend. The more interesting nuance is that persistent low turnover can actually entrench the company’s database advantage: the longer consumers stay in place, the more intent data accrues before a future cycle, which should support a sharper rebound if rates fall; however, that optionality is likely months away, not weeks.

Home Depot is the cleaner cyclical recovery trade, but it is also the most vulnerable to a prolonged ‘wait-and-see’ consumer that keeps postponing larger projects. The better setup is Sherwin-Williams, where the housing exposure is diluted by non-residential and international mix, so it can keep compounding through a weak domestic cycle while still participating if renovation demand improves. That makes SHW the best quality-duration trade in the group; HD is the better pure cyclical snapback, but with more earnings estimate risk if rates remain restrictive into year-end.

Consensus may be underestimating how long affordability can remain frozen without a meaningful supply response. If mortgage rates only drift lower and not sharply, turnover may improve less than hoped, but the market could still re-rate the winners on margin stability and capital return rather than top-line acceleration. In that scenario, the strongest relative performance should come from names with dividends/buybacks and less dependence on new-home volumes.

Key Decisions for Investors

• Go long SHW vs. short ZG/Z for a 3-6 month relative-value trade; SHW has lower housing beta, stronger capital returns, and better downside protection if rates stay higher for longer.
• Buy HD on weakness for a 6-12 month recovery trade, but size it smaller than SHW; the risk/reward improves only if mortgage rates roll over enough to unlock deferred remodel spend.
• Avoid chasing ZG/Z until there is a confirmed mortgage-rate downtrend; near-term upside is optionality-driven and the path dependency on transaction volumes is still too high.
• Consider a pairs trade long SHW / short a rate-sensitive consumer or housing proxy if you want housing exposure without taking full cyclical earnings risk; SHW’s mix should hold up better in a flat market.
• If the 30-year mortgage rate falls decisively over the next 1-2 quarters, rotate from SHW into HD for higher beta; HD should outperform in the first leg of a housing rebound, while SHW likely wins in the no-recovery case.