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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2020
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Fair Value Measurements 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 applied 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. The fair value measurement of treasury bills, U.S. government agency securities and certificates of deposit 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. 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. Restricted cash — Restricted cash consists of cash received from the resale of homes through Zillow Offers which may be used to repay amounts borrowed on our credit facilities (see Note 11), amounts held in escrow related to funding home purchases in our mortgage origination business and amounts held in escrow related to our Zillow Closing Services business. The carrying value of restricted cash approximates fair value due to the short period of time amounts borrowed on the credit facilities are outstanding and amounts are held in escrow. 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. Interest rate lock commitments — The fair value of interest rate lock commitments (“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. We generally only issue IRLCs for products that meet specific purchaser guidelines. 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. 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 condensed 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:
| September 30, 2020 |  | December 31, 2019
Range | 41% - 100% |  | 56% - 100%
Weighted average | 67% |  | 78%
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 are calculated by reference to quoted prices for similar assets. 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):
| September 30, 2020
| Total |  | Level 1 |  | Level 2 |  | Level 3
Cash equivalents: |  |  |  |  |  |  |
Money market funds | $ | 1,747,818 |  |  | $ | 1,747,818 |  |  | $ | — |  |  | $ | — |
Treasury bills | 5,000 |  |  | — |  |  | 5,000 |  |  | — |
U.S. government agency securities | 1,162 |  |  |  |  | 1,162 |  |  | — |
Certificates of deposit | 249 |  |  | — |  |  | 249 |  |  | — |
Short-term investments: |  |  |  |  |  |  |
Treasury bills | 1,360,084 |  |  | — |  |  | 1,360,084 |  |  | — |
U.S. government agency securities | 499,991 |  |  | — |  |  | 499,991 |  |  | — |
Corporate notes and bonds | 15,635 |  |  | — |  |  | 15,635 |  |  | — |
Municipal securities | 8,679 |  |  | — |  |  | 8,679 |  |  | — |
Certificates of deposit | 996 |  |  | — |  |  | 996 |  |  | — |
Mortgage origination-related: |  |  |  |  |  |  |
Mortgage loans held for sale | 125,324 |  |  | — |  |  | 125,324 |  |  | — |
IRLCs | 9,420 |  |  | — |  |  | — |  |  | 9,420 |
Forward contracts - other current assets | 110 |  |  | — |  |  | 110 |  |  | — |
Forward contracts - other current liabilities | (671) |  |  | — |  |  | (671) |  |  | — |
Total | $ | 3,773,797 |  |  | $ | 1,747,818 |  |  | $ | 2,016,559 |  |  | $ | 9,420 |
| December 31, 2019
| Total |  | Level 1 |  | Level 2
Cash equivalents: |  |  |  |  |
Money market funds | $ | 872,431 |  |  | $ | 872,431 |  |  | $ | — |
U.S. government agency securities | 35,009 |  |  | — |  |  | 35,009 |
Commercial paper | 31,113 |  |  | — |  |  | 31,113 |
Treasury bills | 6,441 |  |  | — |  |  | 6,441 |
Corporate notes and bonds | 1,065 |  |  | — |  |  | 1,065 |
Certificates of deposit | 249 |  |  | — |  |  | 249 |
Short-term investments: |  |  |  |  |
U.S. government agency securities | 862,154 |  |  | — |  |  | 862,154 |
Corporate notes and bonds | 159,431 |  |  | — |  |  | 159,431 |
Commercial paper | 150,267 |  |  | — |  |  | 150,267 |
Treasury bills | 80,003 |  |  | — |  |  | 80,003 |
Municipal securities | 27,889 |  |  | — |  |  | 27,889 |
Certificates of deposit | 1,245 |  |  | — |  |  | 1,245 |
Mortgage origination-related: |  |  |  |  |
Mortgage loans held for sale | 36,507 |  |  | — |  |  | 36,507 |
IRLCs | 937 |  |  | — |  |  | 937 |
Forward contracts - other current assets | 7 |  |  | — |  |  | 7 |
Forward contracts - other current liabilities | (60) |  |  | — |  |  | (60) |
Total | $ | 2,264,688 |  |  | $ | 872,431 |  |  | $ | 1,392,257 |
The following table presents the changes in our IRLCs during the three and nine month periods ended September 30, 2020 (in thousands, unaudited):
| Three Months Ended September 30, 2020 |  | Nine Months Ended September 30, 2020
Balance, beginning of the period | $ | 5,091 |  |  | $ | 937 |
Issuances | 19,232 |  |  | 34,739 |
Transfers | (18,725) |  |  | (31,867) |
Fair value changes recognized in earnings | 3,822 |  |  | 5,611 |
Balance, end of period | $ | 9,420 |  |  | $ | 9,420 |
(1) Beginning balance represents transfers of IRLCs from Level 2 to Level 3 within the fair value hierarchy as of January 1, 2020.
At September 30, 2020, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $256.6 million and $329.9 million for our IRLCs and forward contracts, respectively. At December 31, 2019, the notional amounts of the hedging instruments related to our mortgage loans held for sale were $34.3 million and $64.7 million for our IRLCs and forward contracts, respectively. We do not have the right to offset our forward contract derivative positions. See Note 11 for the carrying amount and estimated fair value of our convertible senior notes.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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