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Economic Cycles and their impact on Time Share Values-What the Future Holds.

September 22nd, 2017

John C Botdorf-Blog Post

RE: Economic Cycles and their Impact on Time Share Values-What the Future Holds.

Dear MYTS Fans,

To Time Share or Not to Time Share? The question of the day. Certainly with today’s internet buffet on travel options it is possible to travel almost anywhere, stay in some comfortable digs, and if your attitude is right, you can have a good time and make most trips worthwhile. That said, the old saying can still apply, “There is no such thing as free”. Well we would have to define free. Time Share is the only real estate business in the world where it is very possible to cover 100% of your cost. We discuss this in detail in Mastering Your Time Share. But the old internet bargain does come with the “you get what you pay for ” more often than not. Generally huge discounts come with getting booked into less desirable units, back of the plane, and marginal food. Does not mean it may not be a bargain however. Cheap is Cheap.

Would if you want to travel cheap but stay in nice digs, a la time share and you want to know how to get started. It is important to understand economics because time shares have some valuable conditions that will by definition, perform very differently depending on where the country is headed in its next economic cycle. We are going to discuss in this blog a few concepts that we believe will apply to times shares in the next 15 years. We all know any of us can predict the stock market is going to crash or suffer a 25% pullback. I read everyday and have for the past 15 years that the market is tired, overbought, interest rates must rise, and we all need to sell everything and live in a cave. Eventually these predictors of dome will be 100% right. At some point the market will take a downturn and the doomsday pundits will flood their blogs with I told you so. Well, you and I can make the same prediction every year for 15 years, and we would be right as well at some point. My point is what good is their advice. It is like saying I predict the earth will have darkness in the next ten hours.

For those that have read our book,, you know we believe that certain time shares are undervalued relative to their housing counterpart. What do we mean by that? Well, in the Newport Beach, California area a two bedroom house with two baths with about 1,500 square feet on the water or with a 180 degree view of the water will cost about $4M today, if you could find it. One could purchase one year of time share, stay every year in an ocean villa, on the water in Newport Beach for about $975,000. My friend commented, “well you really don’t own it”. My answer was: What do you mean by own? Is not the right to occupy 365 day a year the same as ownership? Besides, less than 33% of the homes in the US are actually owned outright. The balance of the population has to pay the bank every month or they will not own their own home. So why does 1,500 square feet in one real estate environment need to cost four times as much for the exact same thing?

This brings us to the point of our blog. Some of us may remember the early 1980’s. Prime interest rates hit 19%. Inflation was running into double digits and it continued for years. What happened to the value of hard assets? They soared as inflation took off. Let’s examine the current state of the US economy. We now owe $19 trillion dollars to bondholders who own our debt. The current Trump administration is looking to mandate a US tax cut to help stimulate the economy and produce more jobs. The handwriting is now on the wall if you look outward for a period over the next 15 years. What is the single best feature or reason to own a time share? You got it. It is the rate or “points” they can charge you to summer in Newport or ski in Vail in the winter. The right time share cannot ever change the price you pay to occupy your villa. Why does this matter? It matters because many of us have not seen, are dead or can’t remember the last real inflationary cycle because it happened over 35 years ago. Most people in their forties in the United States don’t know what inflation is. These are the same people now entering their peak earning years. Why does this matter and what does it have to do with the future price of time shares? I would argue it has everything to do with downstream prices, for everyone.

There are two reasons that interest rates must rise in the future. When they do, the RRC spreads on time shares are going to explode. What does this mean? It means that while operating expenses will rise in line with inflation, rental rates will rise as much or more causing the economic value of real estate to go up. This is true whether you own a home or a time share. Beachfront property is beachfront property. The property itself does not care whether it is owned by 52 one week owners or just one 365 day owner. When taxes get cut nine times out of ten, production goes up, more people get hired, so more homes need to get built. Now the price of lumber and steel go up because all of a sudden there is more demand for copper, lumber, drywall, etc, because everyone needs it. Now the railroad company needs to charge more because it has more customer demand than open rail time. Solution. Just raise your price until demand equals your open supply of rail cars. This cycle then goes on and on. Now, this is reason number one on why interest rates rise. The demand for money goes up. Money is just like hot dogs. If you have ten hot dogs to sell for the day and 15 buyers, how do you solve the problem? You raise the price and go surfing!

Now let’s look at reason number two on why interest rates need to go up. When you owe $19 trillion in debt you have to keep selling bonds. Lots of them over and over. When the world has wars, hurricanes, earthquakes that wipe out whole islands, what happens to the need for capital? It goes up. What happens if Russia needs $15B for a new pipeline, the US wants to improve our freeways (infrastructure) and we need $1 trillion just to upgrade our own highway and travel systems. We go shopping for money, just like Russia. Where do investors decide to invest their money? They take the highest combination of return with the lowest risk profile. So, if we need to borrow more and more money and compete with our own US citizens who need capital to grow, eventually the world economic demand for capital gets short on money. The answer: It is just like the hot dogs. The federal reserve raises the price it will pay for capital and it comes back to the US. But it comes at a cost, we are pay more for everything because the price on money is part of the cost of doing business.

Now back to time shares. Let’s pretend we forgot the 1980’s.It is not a matter of whether prices will go up in the future it is just a matter of how much, and how fast. In fact it is likely we will see relatively speaking, tame inflation into the next election through 2020. Inflationary cycles take years to take off and years to cool down. Imagined you owned a prime summer beach house and I came along and offered to rent it for $10,000 a month forever. You live on the east coast and decide that $10,000 a month for life is a deal since the market is only $8500 a month right now. You are smart enough to make sure that I have to pay the operating expenses. Now, let’s run the math over 15 years with 3% inflation and 10% inflation and see what that $8500 a month rent should be in the year (2017 + 15) 2032. In the year 2032 with 3% inflation the rent is now $13,242 per month and with 10% inflation it is now $35,506, per month, every month. Now for those of us that feel we will be alive in 15 years (your kids most likely will be), how would like to insure you will pay $8500 a month to summer at the beach every year for life, your kids life and your grand kids life and so on. You see, time share is an insurance policy against inflation. Yes, operating expenses will go up, but the rental rates will also go up, meaning the spread between the Daily Rental Rate and the Daily Expense rate (the RRC Ratio) will rise with inflation meaning you just make more money if you rent it out.

Now you can see how inflationary cycles can greatly impact the future value of time shares. You win pretty well if we have low or moderate inflation like we have had in the past several decades. However, when the economy shifts into higher inflationary cycles and your upside occupancy cost is frozen for life, the value of that time share has to soar. I used $8500 a month for an example. Right now prime two bedrooms with two baths on the water in Newport or Maui are renting for $900 plus a day. That is $6300 a week right now or $25,200 a month in 2017 dollars. Let’s run that out 15 years at ten percent inflation at 4.17 times the current weekly rate. $6300 times 4.17 is $26,271 to rent a summer condo for a week in 2032 if inflation hit 10%. There were years in the 1980’s that inflation was much higher that that. This is why time shares are the poor man’s way to own real estate. Whether you use it for pleasure, to live in, or rent it out, most of us would prefer an alternative to the current $6300 for a summer week.