Mortgage Buble Bursts, Ad Market Goes BOOM

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 anyone (like me) 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 54 basis points over the past year, while the far more popular 1 year ARM has climbed by an eyebrow raising 120 basis points, according to Bankrate.com. With Treasuries finally starting to catch up to the Fed’s moves (and with the Fed signaling more increases in the months ahead), the current re-fi party looks pretty close to over. Throw in growing concern over the foundation of the underlying housing boom (“frothy” 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 2006, and the firms reliant upon their ad dollars would be wise to brace for the same.