The Refi Pricing Game

The Motley Fool is in Seattle, visiting online home and real estate marketplace, Zillow (ZG -0.69%). Today, we meet with Zillow Mortgage Marketplace Director Erin Lantz to learn more about how ZMM works, and who it serves.

Erin explains the circumstances and process that is involved in setting a price per click in the refi market.

To view the full interview, click here.

Austin Smith: Given that somebody who's refinancing, I guess I would assume -- correct me if I'm wrong -- since they've already been vetted and qualified once before that the cost per click would be significantly higher than on a new purchase lead? Or am I misunderstanding that?

Erin Lantz: I wouldn't characterize that as the rationale for why refis are higher, but you're right. In today's market, refi clicks are typically higher.

The reason is, you're either in the money, or you're out of the money. If you're in the money, you're probably interested in closing right then, so you're just an easier, lower "manufacturing cost" borrower for a lender to close.

The lender doesn't have to worry about do you have enough of a down payment saved up, and all those types of -- does the seller actually agree to sell you the property you're buying -- so there's just less transaction risk that makes the transaction fall out. Refis are easier.

Austin: OK, got it.

Erin: In the purchase market they're harder, and when you've got an easy refi and a difficult purchase, the lender behavior is to focus on the easy refi. So, although we do see purchase clicks at a lower overall cost right now, we expect, as lenders have to focus on purchase and are searching for more volume, they'll get more efficient, and we'll have more demand for those purchase contacts.

I think that positions us well from a pricing-leverage standpoint.

The other thing that's happening is, as lenders need to learn how to do purchase well, they're looking to technology, they're looking to lead management tools like Moretech to help them do a better job converting those contacts, which are hard to convert because you have to stay in touch with that borrower for three months, six months at a time.

As lenders develop those skills, we think those purchase contacts will become more valuable to them.

Austin: What sort of impact do overall rates have on your CPC? If it's a higher rate, and maybe the lenders get a little bit more from the transaction, does your cost per click go up a little bit? What's the dynamic there?

Erin: The interest-rate environment doesn't impact our click pricing, so, unrelated. The rate environment is important, particularly to the refi market, in terms of the size of the addressable market, so how many consumers are in the money, and how interested are they in transacting at that time.