We worrywarts are getting some company. Barron’s Mark Veverka rounds up opinions on Google’s exposure to the mortgage crisis, one of whom offers the sound supply/demand logic that the “Google is immune” folks often ignore:
[The argument that Google is a crucial source of mortgage leads] doesn’t explain how Google has managed to protect a big piece of a smaller pie, says a money manager at a major East Coast hedge fund. “It is inconceivable that mortgage-related advertising revenue isn’t shrinking,” the manager says. [And Google itself said as much this week].
It’s hard to argue with his logic. The number of advertisers is diminishing as mortgage originators, brokers and affiliated businesses fold their tents. Hundreds of small operators that used the Internet as a way to play the housing boom have gone away. Numerous big financial institutions are getting out of the business or are scaling back their home-mortgage operations. 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. 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…
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.
Of more concern to us than Google’s mortgage exposure, moreover, is the possibility that the mortgage industry will be just the first of many industry dominoes to fall. The “virtuous cycle” of ever-rising house prices that has turbocharged the economy for the past 5 years may reverse into a “vicious cycle”–just as tech and telecom spending in the last recession did.
If this happens, more than “mortgage companies” will be affected. The home builders have already been crushed. But then there are home-supply retailers, construction companies, broader financial services companies (shutting down whole mortgage divisions is not good for overall finances). And now that the “home equity withdrawal ATMs” that goosed consumer spending for the last decade have finally been emptied, consumer spending could take a hit. And that will hurt the rest of the economy (even Google).
Not a happy scenario, and certainly not a given. But Google fans (and Google itself) won’t do themselves any favours by hallucinating that the company is “immune.”