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Fair Value Measurements

12 Months Ended

Dec. 31, 2021

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

•Level 1 — Quoted prices in active markets for identical assets or liabilities.

•Level 2 — Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities.

•Level 3 — Unobservable inputs that are supported by little or no market activity; instruments valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

We apply the following methods and assumptions in estimating our fair value measurements:

Cash equivalents — The fair value measurement of money market funds is based on quoted market prices in active markets (Level 1). The fair value measurement of other cash equivalents is based on observable market-based inputs principally derived from or corroborated by observable market data (Level 2).

Short-term investments — The fair value measurement of our short-term investments is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means (Level 2).

Restricted cash — The carrying value of restricted cash approximates fair value due to the short period of time amounts are borrowed on our credit facilities, home sales proceeds are held in restricted accounts associated with our credit facilities and securitizations, and amounts are held in escrow (Level 1).

Mortgage loans held for sale — The fair value of mortgage loans held for sale is generally calculated by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar characteristics (Level 2).

Forward contracts — The fair value of mandatory loan sales commitments and derivative instruments such as forward sales of mortgage-backed securities that are utilized as economic hedging instruments is calculated by reference to quoted prices for similar assets (Level 2).

Interest rate lock commitments — The fair value of IRLCs is calculated by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar characteristics. Expired commitments are excluded from the fair value measurement. Since not all IRLCs will become closed loans, we adjust our fair value measurements for the estimated amount of IRLCs that will not close. This adjustment is effected through the pull-through rate, which represents the probability that an interest rate lock commitment will ultimately result in a closed loan. For IRLCs that are cancelled or expire, any recorded gain or loss is reversed at the end of the commitment period (Level 3).

The pull-through rate is based on estimated changes in market conditions, loan stage and historical borrower behavior. Pull-through rates are directly related to the fair value of IRLCs as an increase in the pull-through rate, in isolation, would result in an increase in the fair value measurement. Conversely, a decrease in the pull-through rate, in isolation, would result in a decrease in the fair value measurement. Changes in the fair value of IRLCs are included within Mortgages revenue in our consolidated statements of operations.

The following table presents the range and weighted average pull-through rates used in determining the fair value of IRLCs as of the dates presented:


	December 31, 2021	December 31, 2020
Range	42% - 100%	47% - 100%
Weighted average	85%	75%

Beneficial interests in securitizations — The fair value of beneficial interests in securitizations is calculated using a discounted cash flow methodology. We rely on significant unobservable valuation inputs as the investments do not trade in active markets with readily observable prices and there is limited observable market data for reference. The primary unobservable inputs include the assumptions related to the expected timing and amount of prepayments and the discount rate of approximately 8% applied to the projected cash flows. An increase in the amount of prepayments, in isolation, would result in an increase in the fair value measurement (Level 3). An increase in the discount rate, in isolation, would result in a decrease in the fair value measurement (Level 3). As of December 31, 2021, we have included the expected full prepayment of both beneficial interests by the fourth quarter of 2022 due to the planned wind down of Zillow Offers operations.

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of the dates presented (in thousands):


	December 31, 2021
	Total		Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	2,132,389	$	2,132,389	$	—	$	—
Short-term investments:
U.S. government agency securities	470,851		—		470,851		—
Corporate bonds	33,080		—		33,080		—
Commercial paper	9,991		—		9,991		—
Beneficial interests in securitizations	75,103		—		—		75,103
Mortgage origination-related:
Mortgage loans held for sale	106,753		—		106,753		—
IRLCs	4,626		—		—		4,626
Forward contracts - other current assets	212		—		212		—
Forward contracts - other current liabilities	(222)		—		(222)		—
Total	$	2,832,783	$	2,132,389	$	620,665	$	79,729


	December 31, 2020
	Total		Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	1,486,384	$	1,486,384	$	—	$	—
Municipal securities	3,228		—		3,228		—
Short-term investments:
Treasury bills	1,163,813		—		1,163,813		—
U.S. government agency securities	1,037,577		—		1,037,577		—
Municipal securities	16,220		—		16,220		—
Certificates of deposit	498		—		498		—
Mortgage origination-related:
Mortgage loans held for sale	330,758		—		330,758		—
IRLCs	12,342		—		—		12,342
Forward contracts - other current liabilities	(2,608)		—		(2,608)		—
Total	$	4,048,212	$	1,486,384	$	2,549,486	$	12,342

For the year ended December 31, 2021, the change in the balance of beneficial interests in securitizations was due to increases related to our new securitization transactions and unrealized gains of $8.9 million. The following table presents the changes in our IRLCs for the periods presented (in thousands):


	Year Ended December 31, 2021		Year Ended December 31, 2020 (1)
Balance, beginning of the period	$	12,342	$	937
Issuances	69,958		63,662
Transfers	(78,898)		(60,648)
Fair value changes recognized in earnings	1,224		8,391
Balance, end of period	$	4,626	$	12,342

(1) The beginning balance represents transfers of IRLCs from Level 2 to Level 3 within the fair value hierarchy as of January 1, 2020.

At December 31, 2021, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $305.0 million and $387.8 million for our IRLCs and forward contracts, respectively. At December 31, 2020, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $378.1 million and $652.1 million for our IRLCs and forward contracts, respectively. We do not have the right to offset our forward contract derivative positions.

See Note 13 for the carrying amount and estimated fair value of our securitization term loans and convertible senior notes.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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