Summary
Yahoo! stock dropped 11% on Tuesday after the Company warned of slowing ad spending, particularly from the large auto and financial services sectors. Few people realize how dependent the entire online advertising industry is on the mortgage market. Learn how higher interest rates and slower housing sales could dramatically impact online advertising spending.
Analysis
Very few people realize how closely intertwined the housing/mortgage bubble is with online advertising. The frenzy in lending is the primary driver of the skyrocketing growth of ad spending.
There were 44,000 mortgage brokers in the United States in 2002. That number increased a whopping 20% to 53,000 brokers in 2004 (source), who accounted for 68% of total lending. (Direct lenders account for the remainder.)
Mortgage lenders are now amongst the biggest spenders for online advertising, specifically for search and lead generation programs. Of course, the high value of a mortgage origination means that these marketers can pay a high price per lead and still have a stellar ROI, but the intense competition has fueled skyrocketing prices for limited inventory that has spilled over to most other categories as well. In addition, with insatiable appetite for online leads, ‘stellar’ and ‘ROI’ aren’t used together too often anymore by this crowd. Most of the brokers I’ve met recently don’t even know how to calculate their ROI.
The mortgage business is tremendously cyclical, as someone who was involved in it through the 90s can tell you. Changes in interest rates and market dynamics whipsaw this industry like no other. In case you haven’t been paying attention, rates on 30 year fixed loans are up 63 basis points over the past year, while the increasingly popular 1 year ARM has climbed by an eyebrow raising 106 basis points, according to Freddie Mac. With the Fed indicating a continued bias towards stable or higher rates, the current re-fi party looks pretty close to over. Throw in tightening lending standards, a three year low in housing starts and softening pricing in many markets, and it looks like a good bet that many of those 9,000 new mortgage brokers won’t be around for the long term.
Competition for online leads should grow more intense before the great flameout begins, though Fathom Online’s sketchy monthly keyword tracking report shows pricing for mortgage-related keywords down 15% from the year ago level. Total online ad spending by mortgage companies is the more important metric to watch. Experienced lenders are bracing for a very tough 2007, and the firms reliant upon their ad dollars would be wise to do the same.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
