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Franchise Buying Related to Housing Market / Mortgage Rates?

I just read a post from FranPro on how the market is softening for franchise brokers, those firms that match their franchisor customers up with franchise buyers.

If the franchise market is largely dependent on the availability of loans to fund a franchisee's capital requirements, it makes sense to me that the franchise buying market largely follows the housing boom.

When interest rates are low, housing prices boom. Housing prices boom, then lenders feel more comfortable lending funds with housing collateral. Franchise buyers feel a little richer too since their homes are worth more money.

What say ye? Does growth in franchise buying directly correlate to the housing boom and bust cycle?

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I agree with this - "When

I agree with this - "When there are lots of quality jobs in the market, the franchise industry does tend to slow down." The Franchise Maker

Franchise cycles/Housing market etc...

Great question. I really have no idea, though.

Here is one fact:

When there are lots of quality jobs in the market, the franchise industry does tend to slow down.

For instance, the early 2000's were very busy and intense for our industry.

Franchising got some great new owners during the recession.

"What comes up, must come down"

FRANPRO 

Craig Hsueh's picture

Tight Money Dampens Franchise Buyers?

Well put. What goes up must come down!

The key question in looking at the ball is the tipping point of knowing when the ball is about to come down so as to be ready for it.

It makes sense that a tightened money supply dampens new business loans and hence start-up franchises. If the Fed tightens money enough through high interest rates, then the would-be business owners feel less available equity to get a business loan. On the other hand, the common wisdom with franchise development departments is that if the economy contracts, there is a fresh wave of laid-off workers who want to be their own boss.

On both topics comes this Economist article ($$) from my morning read:

"It is in the American housing market that the bear may growl loudest. By borrowing against the surging prices of their homes, American consumers have been able to keep on spending. The housing market is already coming off the boil. If prices merely flatten, the economy could slow sharply as consumer spending and construction are squeezed. If house prices fall as a result of higher bond yields, the American economy could even dip into recession. Less spending and more saving is just what America needs to reduce its current-account deficit, but for American households used to years of plenty it will hurt"

So, the question is - is it tightening money that dampens the franchise buying market or does it spark a recessionary boom? I wonder if the recession isn't what causes the availability of franchise investors but the low-cost of loans of a government lowering interest rates to spark economic recovery.

If that's the case, then predicting franchise-buying is simply watching interest rates and new business start-ups.

At the bottom of the recession, you get the best of all worlds for franchise development. There is the largest number of outplaced workers and the government lowering interest rates to spark economic growth.

The ball begins its ascendency. 

I wonder what the numbers say?

Craig Hsueh's picture

Franchise Buying Market Prediction

So if the availability of capital and a soft economy determine an upbeat franchise buying market, then 2005 should have been a soft year to be a Franchise Buyer as would be 2006.

No one is crying recession yet or lowering interest rates in '07, so a strong franchise development market in '07 is as yet unknown. Watch for high interest rates and two quarters of falling economic growth.

Franchise is Hope In A Dark Market

You got that right. To many a small businessman, franchising is a ray of hope at the darkest hour of economic gloom. It is easy to believe that as the fed attempts to lift the economy by lowering interest rates, that is when the huge sector of new franchises kicks the small business base of the economy into high gear.

Yeah for new franchises, the indicator that better days are ahead.

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About Craig Hsueh

Craig Hsueh's picture

Public Profile

After years of corporate life, I bit the bullet and bought a franchise, where I now happily live by hand to mouth week by week as my own boss and president of the company. Love it.

Area of Interest
Buying a Franchise