What the Subprime Mess Means for Real Estate 2.0
Innovation in real estate 2.0 has largely been driven by two things over the last year; deep VC pockets and a bullish expectation that real estate advertising dollars are starting to flow online.
In a red hot market, this looked like a sure bet. And there is no doubt that more advertising dollars are still being transferred to online media from offline media these days. But with a tightening market, flattening house prices across the country, downward pressure on commissions and a definite chill in the air around real estate, this is starting to look scary.
I suspect many companies involved in real estate and all the affiliated services (mortgage, lending, etc.) are taking a real hard look at their marketing budgets for ‘08 right now.
This reminds me a lot of the first dot-com crash I witnessed, where the stock market bubble pop saw tech marketing budgets decimated (and me out on the street, as our business model depended on those dollars).
I can’t help but wonder if we’re seeing the same thing now, and I suspect we might be. The NY Times is reporting LowerMyBills has lowered its ad spend. For the last year, the company blitzed the web with bizarre dancing figures ads. This month they’re nowhere to be found.
The Financial Times takes it a step further and speculates that the ripple effect in an real estate advertising slow down could spill over and affect Pay-Per-Click campaigns on the search engines. Mortgage lenders Countrywide and Low Rate Source were two of the 10 biggest online advertisers last month according to Nielsen/NetRatings - it’ll be real interesting to see where the end up in next month’s figures.
While the mainstream portals can likely weather this storm by bulking up inventory from other verticals - real estate 2.0 companies face a huge and potentially catastrophic challenge here if the ad dollars don’t return.
This was me, last year, in a post called Real Estate 2.0 Survival Prospects.
[this is] relevant to the Web 2.0 space and the new crop of real estate sites that are entirely advertising dependant. It strikes me that they are particularly vulnerable should there be any large scale slowdown in the economy. Whether that’s spurred on by what happens in the housing market, that’s anybody’s guess - but would be especially ironic nevertheless.
In that piece I put companies like Zillow and Trulia on watch because of their advertising dependent business models. I suspect there are some very nervous execs at both of those companies right now, worred that the Realtors, brokers, mortgage lenders all start slashing their budgets. They’re in tight quarters and have nowhere else to turn. Both shoulder large developer staffs and likely have VCs anxious to see some path towards profitability.
Looks pretty grim. If a prolonged housing slump means real estate related ad dollars disappear over the next two years, these companies are in for very lean times ahead. Time to batten the hatches and brace for bumpy seas ahead.
UPDATE: Active Rain Unleashes Impression Advertising - bad timing?
If you enjoyed this post, make sure you subscribe to my RSS feed!
Make sure to follow FOREM on Twitter too!
18 Comment(s)
10 Trackback(s)
- From Disruptive RE Broker » Blog Archive » RE marketing dollars - MA, RI, CT, NY Flat Fee MLS Listing Service | Aug 28, 2007
- From What the Subprime Mess Means for Real Estate… — Register or Signup to Free Internet Services | Aug 28, 2007
- From Investment future - Get There Early: The VUCA Opportunity | Aug 28, 2007
- From What the Subprime Mess Means for Real Estate 2.0 | Future of Real Estate Marketing Blog | Aug 29, 2007
- From Renthusiast.org | Aug 29, 2007
- From Friday File – The Bright Spots of the Week in Real Estate Blogging | Future of Real Estate and Loans | Aug 31, 2007
- From 1000watt Blog | Sep 4, 2007
- From Inman News Blog: Subprime mess beyond the borrowers | Sep 4, 2007
- From Storms Ahead for Real Estate Sites | Future of Real Estate Marketing | Sep 13, 2007
- From Cease and desist | 1000Watt Consulting | Mar 24, 2009
Lenore Wilkas | Aug 28, 2007 | Reply
Add in Home Depot’s sale today of a subsidiary for $2 B less than anticipated due to the housing mess. I think any major company that touches housing in any way is concerned.
I never ever could understand why ad budgets get cut first thing. Those that keep advetising are the companies that remain top of mind and continue to get business. The others are short sighted in my mind and as somone who once sold advertising space online I saw it happen over and over.
Incredible Agent | Aug 28, 2007 | Reply
Anyone who depends on RE advertisitng dollars is seeing a huge slowdown and will have to cut back. (see HouseValues, RealEstate.com, Etc.). It’s called “trickle down economics” and it will affect a lot more than the RE 2.0 crowd.
Loren Nason | Aug 28, 2007 | Reply
I agree that a lot of “RE 2.0″ sites will see reduced income from ad spend and there even be sites that disappear because of no ads being bought.
Is it a bad time for Active Rain to release there ad platform?
I don’t think so. REALTORS will be looking for products/services to enhance their business in a slow down. They might be looking to lower costs and or improve on their tech usage or…..
I’m considering an ad on the Rain to increase my exposure and increase business. I don’t have lots of time to post on the Rain because I am working and growing so advertising on the Rain seems like a good idea
karim tahawi | Aug 28, 2007 | Reply
Nice post! No doubt that ad dollars will shrink but one thing to consider is that web2.0 start-ups face an adoption challenge when times are good. Why would some cigar chomping fat cat want to mess with things when things are firing on all cylinders? (I like cliches at the moment J). The tension between the pie shrinking and adoption has a net balance that isn’t obviously negative for start-ups.
Rich Barton | Aug 28, 2007 | Reply
I offer a few comments to explain why I’m still sleeping pretty well at night:
1. In a mature media, like TV or Newspaper, a 5-10% pullback in advertising revenues is a major negative. In a nascent medium, a pullback like this tends to slow down the growth rate, but not change the fact that it is growing. I see a tidal shift from offline to online in brand and direct response advertising right now. This will likely swamp any cyclicality.
2. When business gets tight for advertisers, they tend to look hard at their ad spending and retreat back to spending that is more accountable. This hugely favors internet advertising spending over harder-to-measure offline expenditures. I believe an over all economic downturn, if it comes, will lead to a more rapid shift of offline ad expenditures to online.
3. At Zillow, specifically, our average household income of a visitor is $91k per Neilsen NetRatings. This is the top HHI amongst major media sites. While our “endemic” (real estate-related) advertiser base is large, a meaningful % of our advertisers are non-endemic and interested in the demographics of our visitors to sell cars, telecommuncations services, etc. I assume that is similar for other real estate media sites as well.
Anyway, we don’t have our head in the sand at Zillow, but we are also don’t think the sky is falling.
Rich Barton
CEO, Zillow
Thomas Johnson | Aug 28, 2007 | Reply
Don’t forget teh effect of lower priced on the darling of the dinosaur media: Red Ink, er, Redfin.
Joe from VideoHomes | Aug 28, 2007 | Reply
“cyclicality”?…uhmm… All kidding aside Rich is right, a downturn will accelerate online ads though at the expense of the ‘traditional’ buys. Remember the 80/20 rule? How about a new take on it? The 80/80 rule. 80% of ad dollars are spent off-line but 80% of buyers are online.(or something in that ballpark). Point is, it makes sense to increase online spending even though one may decrease their overall ad budget.
The real question is: Why is it so hard for the industry to break out of their ‘traditional’ media buys? In a word LOCAL. Agents see that stats favor the web but their gut says ‘don’t leave the local paper’. This ‘gut instinct’ amounts to something more than agents just not being able to ‘break old habits’. There is more to it. Something about LOCAL grabs hold of people and leverages a familiarity that consumers have with their own environment. This local atmosphere is a very difficult thing to tap into for national websites.
LOCAL is defined by more than just importing ‘local data’ from the county courthouse; it is about having value off-line. Agents won’t ‘let go’ because they fear online media lacks the off-line characteristics that their local paper offers. Sellers want to hear about their agents LOCAL efforts for the sellers perceive real estate to be about ‘location’. And given that most homes are bought by consumers that live in the same area…it IS about location. Oh wait, location, location…what’s that last thing?
Off-line recognition of an agent’s advertising is crucial to his/her ability to attain new listings. We should not be so fast to dismiss how important the presentation of the agent’s marketing campaign is during the listing process. Cyberspace is great…it’s where the #’s are at, but people in general will never entirely let go the local branding created by a specific singular entity. Personally I have no interest in reading the “Scranton” section of USA Today, I want to read the Scranton Times. And please…no jokes about Scranton lol
Tim | Aug 29, 2007 | Reply
It’s times (and conditions) like these that force brokers/agents to get creative–and that’s a good thing. Ad budget will be cut, as well as many other budgeted items, as the mindset turns to “survival mode.” What they cannot afford in cash dollars they will make up for in sweat equity. Look for more broker/agents setting up mutliple profiles on mutiple socail networking platforms (e.g. facebook, linkedin, etc.) in an effort to harness the power of the word-of-mouth effect online. Also, you may see in increase in company/agent blogging in an effort to drive their own traffic.
I agree with Rich that more of the ad spend will be going online, however over time you may see that these socail marketing/word-of-mouth camapings, combined with the increasing power and significance of social search that taps into the whole “trust-a-friend” architecture, will replace the need for things like banner ads, paid links, and yes even SEO.
Forget about Zillow or Trulia, even if I were Google I’d be nervous.
p.s. Check out Scoble’s video on the emerging importance of the social graph. Not only is it fascinating, but Google doesn’t even know it exisits..
http://www.kyte.tv/channels/view.html?uri=channels/6118/47141#uri,channels/6118/47141
Ray Nelson | Aug 29, 2007 | Reply
While ad dollars may decrease especially from the mortgage sector. I would think that Countrywide will continue to advertise heavily to prevent home buyers from thinking that they have gone under. Other mortgage companies and banks which survive will also continue to advertise so as to increase their market share at others expense (e.g. Countrywide).
I think that those web sites that provide real benefit to home buyers will continue to survive and probably get stronger. However, the benefit must be seen by the Realtor or mortgage broker and margins will be tighter. Sites which have provided marginal traffic or leads will lose ad dollars fast.
Depending on the report you read between 80 and 90 percent of home buyers are starting their search On-line. Sites that provide broad real estate content which allows the visitor to enjoy and benefit from the On-line experience will continue to thrive. Those that have minimal payback to the home buyer will sink fast.
From a Web 2.0 standpoint we are looking at a repeat of the dot.com bubble. Those with strong business models that meet the needs of the customer will survive and those whose benefit is questionable will fall.
I think that those sites that have shifted or rapidly shift focus to ensuring a great experience for the home buyer will end up with the lion’s share of the advertising dollars.
Christian Sterner | Aug 29, 2007 | Reply
Whenever a downturn mentality is coming into play in the marketplace, I find myself asking, “what would Warren Buffett do?” The answer is that downturns are where stars are born. Fact is, if there is a major downturn, advertising is going to be on sale (buying opportunity). If a person is/has been advertising heavily when times are somewhat good in the marketplace, I say increase, or at least maintain that spend (your competitors probably won’t).
I personally am most interested in the companies/technologies that offer the most amount of liquidity in the housing sector right now (I spend my days/nights working for one right now). My mom worked for Fannie Mae while I was growing up, when the S&L crash happened. I wonder if Freddie and Fannie Mae are the bail out companies again? If not, who is?
Rossi | Aug 29, 2007 | Reply
Great post, and I will ad that real estate agents and companies have been spending advertising and marketing dollars in all the wrong places for all the wrong reasons for years. I’ve asked hundreds of agents and companies, “What is percentage return on advertising and marketing dollars?” The answer, “I don’t know.” Like knowing the return on your investment is some mysterious concept.
The most common answer to, “Why do you spend marketing dollars for ________ (fill in the blank)?” “I guess because everyone does.” “STOP IT,” is my sage consultant advice.
Now that their dollars are tightening up will they seek to determine the return? The good one’s will.
Terry Van Horne | Aug 29, 2007 | Reply
I manage over 6 figures in the most competitive sector in the financial industry. What the Times article and has been missed here is that this is an off season. I decrease budget by 40% on Google and turn all others off entirely. I recommend my clients to schedule holidays for this period or cut the dead wood. Look at the resets for mortgages and it’s evident it’s not just sub prime slime fallout there is also a natural decrease due to advertisers not wanting to be selling Xmas trees in August.
That’s what happens when The Times and the “Booyah Network” comment on things based on half baked research. I would ask myself if this article is trying to get the real deal or cast aspersions because search is “eating their lunch”.
Why not just contact countrywide and ask straight up if they have decreased ad spend at Google. In fact I’ll bet if they did they’d hear the real facts are a decreased spend will result in share gains for Google & interactive/trackable advertising. TV and Newspapers are black boxes that can’t prove (beyond a doubt) a single stat about audience size, demagraphic or that any action was even taken at any time. It’s an estimated number based on crappy collection and metrics suitable only for branding and other untargetted shotgun marketing techniques.
Rebecca Levinson | Aug 29, 2007 | Reply
Those companies in the real estate “2.0″ space who jumped in to make a quick buck, or didn’t have a more long term strategy might be in a bit of trouble. Just as many agents flooded the industry when times were good, so did these companies. The current tide will weed out those who are in it to win it from those who got in it to shortcut the race. And you speak of Real Estate 2.0, but I don’t see all that much happening yet, when you consider that not even all real estate agents have their own real estate website (I am dismissing a template off their company website), let alone a blog or any form of social media, there is enough room for growth and profit for those willing to do it right.
Rebecca D. Levinson- http://www.connect2agent.com
Louis Cammarosano | Aug 31, 2007 | Reply
Nice to see that reality is setting in. Drawing a million or three visitors that just want to look up the inaccurate estimated price of a home generated by an algorithm that more than a half a dozen companies also offer (Zillow) or showing an incomplete set of listings supplemented by heat maps (Trulia) and trying to make money selling a few ads is not a sustainable business model.
Web 2.0 is hype along the lines of the dot com bust. Interesting that the VC’s which are supposed to be smart money don’t catch on earlier…..
Ryan | Sep 2, 2007 | Reply
Much of this may be true in the residential marketplace. However, in the land for sale marketplace we (www.landflip.com) are seeing a surge in new customers looking for a more effective and lower cost to advertising. In fact, we are boosting our ad spending. http://www.prweb.com/releases/real-estate/land-for-sale/prweb549396.htm
John Schroeder | Sep 4, 2007 | Reply
I agree with the theory of increasing spending when business is slower. Most of your competition will decrease their spending. True more dollars will continue to shift online. Where online is the key. Re-evaluating our ROI from different advertising sources is going to be key. It’s easy…just be where the buyers and sellers are.
Kansas City Real Estate Agent | Sep 4, 2007 | Reply
I wouldn’t spend any more or less than you had planned to spend when you set your business plan. Now that’s not to say you shouldn’t spend more or less if your next business plan calls for it. But making knee jerk reactions is never a good idea. Have a solid business plan and follow it.
Jonathan Cardella | Dec 20, 2007 | Reply
First off, online advertising is dynamic and many decisions to purchase (more inventory) or cut back on spend, can be made in near real time. Meaning, as a veteran online advertiser, if I am not seeing conversion rates that provide ROI and justify my spend, if I am doing my job, I will cut my spend and reallocate it to more productive buys or just hold off and save my budget for a more friendly environment. If (sales) conversion is dropping, I am not increasing my spend like Rich suggested.
Furthermore, while the online advertising industry as a whole may very well see an increase proportionate to offline advertising during a market slump, as current, the reallocated online ad spend is normally dedicated to performance based advertising such as pay per click, search engine optimization (a medium to long term investment that should produce ongoing returns), email marketing, etc.
What is normally cut first is impressioned based marketing since it requires an upfront commitment of capital on a fixed cost basis such as CPM based advertising. This is exactly Zillow’s model, to charge $10 per CPM or $100 per 10,000 impressions, as stated on their website, regardless of the result.
The actual CPM rate is normally derived as a function of the quality of traffic, how targeted the ad is, how likely it is to convert, etc. In the case of Zillow, you can target customers in certain zip codes. In my book, that doesn’t mean the ad is targeted to my listings which often only appeal to a very finite cross section of the users searching for that given zip code.
Targeted to me means being able to target a certain demographic, people searching for a certain price range, users searching with certain keywords, or home search profiles, etc.
I have not seen any type of advanced targeting at Zillow or other 2.0 startups, nor have I seen anything that even resembles performance based marketing. Relatively untargeted (Zip Code) CPM based advertising better resembles ROI for traditional offline media buys than it does search based advertising.
In a downturn such as this, IMO the main web based advertisers that are positioned to gain are the big players such as Google Ad Words and Yahoo! Search (PPC), once the agent figures out how to use them. As do “free” mediums such as Blogging and SEO.
Finally, people who show up at Zillow are curious about their home’s value more so than they are looking to find a home to purchase or an agent to represent them. You have to evaluate the quality of the user base carefully when making untargeted CPM based buys and Zillow has not demonstrated that quality yet. In short, don’t expect Zillow or Trulia to thrive in this environment.