In my last blog post, I detailed how the inventory shortage was having a serious negative effect on home inspectors in many areas across the country. Hopefully you took a minute to visit the blog post to watch the SWOT video. If not, here is the link again.
Today I want to talk about the second threat to your home inspection firm and that is rising interest rates.
Higher rates can have a negative impact on housing affordability and may decrease marginal demand, especially if interest rates move significantly higher over today's levels.
Did you know that for every 1% increase in interest rates it reduces the buyers ability to purchase by 10%.
Let’s look at an example of what this means to home buyers.
The interest rate is 3.5% and the home buyers qualify for a $500,000 home, now the interest rate goes to 4.5% so the buyer is only qualified for $450,000, instead of $500,000.
Higher mortgage rates can decrease housing affordability, and thus have the potential to lower the demand for home purchases.
The rise in mortgage rates comes at a time when many millennials are entering the home market for the first time and may be affected by small changes in affordability. Their impact on overall housing demand is significant, as some 40% of first-time home buyers in 2017 are likely to be within this demographic.
Add to this dynamic that student debt default rates have climbed in recent years, potentially tainting the pool of future Millennial mortgagees in an environment of tighter mortgage underwriting.
Higher rates can also impact existing home owners looking to move into a new home. These potential home buyers may now face an additional hurdle when considering a move as their existing mortgage rate may be significantly lower than what they would pay on a new home.
Most experts agree that by the end of 2017 the average 30-year fixed mortgage rate will to rise to 4.6%. However, should 10-year Treasury yields move to somewhere between 3% to 4%, we will see mortgage interest rates in the 4.75% to 5.75% range.
If mortgage interest rates climb into the 5.75% range or above, there might be less homes being purchased and therefore less inspections to be had. We don’t want that potential issue to affect your firm negatively if it occurs.
To combat this we have taught our clients to conduct a SWOT Analysis on their firm.
A SWOT Analysis is a study undertaken by your firm to identify your internal strengths and weaknesses, as well as your external opportunities and threats.
By doing a SWOT Analysis you can develop a “Plan B” for your firm in case the inventory shortage worsens in your market.
Check out this free video we did for our clients about how to do a SWOT analysis on their business. The video is Free and very helpful so check it out today so you can start taking advantage of the information generated.