Home Sales: Trees, meet Forest

I'm kind of busy right now, so blog posts will be a little shorter and further between.

The Insider counts the reported drop in new home sales to mean that Google will suffer. They haven't drawn a clear line from A to Z, but whatever.

Brad De Long puts up a graph putting this decline in perspective.

What does it mean? I don't know. But that's kinda the point.

Interestingly, I think Blodget believes that the decline in new home sales means there will be a recession that will impact consumer spending and thus the companies that market to them who will respond by cutting online advertising spend. While this is a rather long train of speculation to support, I'm personally more worried about the car immediately following the locomotive: that recession thing. That seems like a more interesting topic than Google's growth slowing from a gazillion percent a year to a bazillion percent a year.

Adteractive Acquired?

Here's a second-hand rumor that Apollo Group acquired Adteractive.

If what I knew of Adteractive is still remotely true, the acquisition would be material to Apollo and have to be disclosed. Nothing on Edgar to date. They disclosed a month or so ago that they were acquiring Aptimus for $48 million. Adteractive would go for more than that, unless they've seriously imploded.

Fred Wilson on Intellectual Property

Fred Wilson blogs his opinion on whether VCs should blog. The answer is somewhat self-evident, but his post is interesting reading, as always.

He quotes one Boston-area VC saying, essentially, that he's not giving away his hard-earned knowledge to anyone other than portfolio companies and potential portfolio companies. Fred thinks that intellectual property should be shared, out in the open.

I agree. I think there are two types of people: those who need to hoard the knowledge they have because they aren't getting new knowledge fast enough and those who can give away what they have because they are learning or generating new knowledge so quickly. Fred is clearly one of the latter. I think we should all aspire to be one of the latter.

As an aside, when I was a VC I found that what I learned had a very short halflife. I tried to give it away as quickly as possible because in a few weeks or months, it would become worthless. As I said here, yesterday's idea is yesterday's idea. The best way for a VC to keep the startup machinery healthy (and thus keep themselves in companies to fund) is to let entrepreneurs know what the current thinking is so they can come up with something entirely new. I doubt Fred shares intellectual property because he's an altruist: I think he wants to help people think of new ideas so that he continues to have plenty of investment opportunities. That's good business.

Weintraub on Lead Gen

Jay Weintraub--one of the few really knowledgeable people willing to write frankly about lead gen--writes about payday loan and subprime credit card lead gen. A pretty dense read, but information you'd otherwise have to spend a year and several hundred thousand dollars of misdirected email and mispriced offers to learn.

Mortgage Application Data

I'm not going to write about the mortgage market anymore (after this that is.) I'm not really interested in the mortgage market, I'm only interested in the marketing. I write about mortgages so much because mortgage lead gen and new car lead gen were the canaries in the coal mine for online lead generation and they remain the two most mature lead gen verticals.

That said, something about the reporting on the subprime mortgage market jitters kept bothering me. Holders of mortgage debt are having financial problems because some of that debt looks to be going bad. But what does this have to do with the underlying business of mortgage lending?

Here is some data on mortgage applications from the Mortgage Bankers Association. First, applications for purchase mortgages:

Note that the y-axis is clipped, showing 90 to 130 of this seasonally adjusted index (week of 1/2/2003 equals 100.) You'll notice that purchase mortgage applications peaked about two years ago, bottomed out a year ago and have been generally climbing since.

Now, refi:
Aside from the madness that was Spring 2003, applications have been generally climbing since beginning of 2006.

There does not seem to be a link between people defaulting on their subprime mortgages and mortgage applications, these two things are probably mostly disjoint.

My point is that mortgage originators are not having any trouble finding customers today that they didn't have in the first half of the year: there are just as many--if not more--applications. Lenders may not be accepting as many applications as they were, but the "end-customer pool" does not seem to be "drying up", as claimed in this Barron's article.

Dissecting the "Obvious"

The Insider points to a Barron's story about the effect on Google of the sub-prime mortgage bubble popping. I feel like I'm beating a dead horse feeding a full horse here, but here are some quotes from the Barron's article--the meat of the article was an interview with a hedge fund manager, who we should not presume to be objective--and my thoughts.

It's hard to argue with his logic.

Oh, pshaw.

For loyal advertisers still open for business, it only makes sense for them to slash their ad budgets as their revenues slide because of industry woes.

That's the old "if you can't defend it, call it obvious" trick. Why does it make sense to slash ad budgets when revenues slide because of industry woes? If the woes were customer woes, perhaps. If the woes were operational woes, perhaps. But "industry" woes? Isn't that when you want to increase ad expenditures and grab market share?

On top of that, the going rates in key-word auctions are plunging because there are fewer eager bidders. Thus, the prices Google fetches for paid search are probably declining, especially as fewer Internet leads turn into actual transactions, the hedge-fund manager says.

Mortgage related keyword prices are not plunging, according to SEM specialists Reprise. Conversion rates on leads are not plunging, according to lead management specialists Kaleidico.

According to the fund manager's back-of-the envelope estimates, it could be costing some major lenders who spend millions on paid-search more than $10,000 for every lead that results in a closed loan -- an expensive marketing program. "The math doesn't work," he insists.

Where the heck did he get those numbers? I talked about this already: average cost to close a loan coming from internet marketing was $1,958 in 2006 (according to Fannie Mae.) The cost for online lead gen is, I estimate, more like half that. So this hedge fund guy is saying that close rates for people who have filled out a form with lots of personal information have been cut by 90% over the course of a few months.

Now, while this may have been true for a week or so in the midst of all the panicky coverage of the sub-prime "meltdown", I refuse to believe this is the new reality. Things change, but they don't change that quickly that fast when it comes to consumer behavior.

If he isn't pulling these numbers out of a hat then he's talking to originators who buy keywords for branding, not for ROI-driven customer acquisition. Those lenders pay indiscrimate prices and don't know how to drive from click to close. They were paying $10,000 for a customer a year ago and are paying close to the same now. Those companies will stop buying keywords and start buying leads, leaving the lead gen to the professionals.

Even if the ad cost per loan application is lower, the end-customer pool is drying up. The customers generated by Web ads are people who won't be able to afford homes under tighter credit and won't be able to refinance after having tossed their house keys back to the banks.

A font of misdirection! The customers generated by web ads often are sub-prime because those are the leads the originators wanted to buy. Purchase leads, the majority of leads generated went begging. So, if mortgage originators decide that if there is no more sub-prime business they're just going to take their call center and go home, then web ads will follow. If, on the other hand, they suck it up and start pitching purchase mortgages again, then web ads are still an excellent business to be in.

There are a lot of moving pieces here, but it pays to start with reality when trying to see what the future holds.

So When Does Forbes Apologize?

A month ago I took Forbes and Dan Lyons (aka Fake Steve Jobs) to task for his articles about SCO that turned out to be profoundly misguided.

To his credit, he has admitted that he got it wrong. I admire him for that.

The part that still bothers me is that his apology is "I got it wrong." Reporters are supposed to report, aren't they? While Lyons might be off the hook for me, I still wonder why Forbes feels the need to be a journal of opinion rather than reporting.