Long term value of DVC

[zavandor]

I've just read an interesting article about long term value of DVC on the Fidelity website:
http://blog.fidelityresales.com/long-term-value-of-disney-vacation-club-ownership

First interesting thing is that they published the average value of contracts sold for each resorts in 2014 (sell price can and is very different from asking price).
Then they calculated how much the resort retained its value over time comparing with the price per point on opening day.
Result is interesting, looks like OKW is the winner while AKV is the worst.
However I think there is something they forgot: inflation.

OKW was $51 per point, but back in 1991. I found an inflation calculator online and found out that those $51 are now worth $101 (wow, that's scary).
So the current resale value is about 50% of the initial investment.

I'd like to calculate the same value for all resorts, where can I find opening dates and price at that time for all resorts?

Of course this is just a silly game. Even if other more recent resorts perform better accounting for inflation, OKW owners got nearly 25 years of vacations with those points, so the current value is still amazing.

 

[chalee94]

http://disboards.com/threads/dvc-resource-center.2823943/

 

[supersnoop]

Anyone else think their average sale prices from 2014 are off? Those just don't come close to what we've seen in the ROFR threads.

 

[Brian Noble]

However I think there is something they forgot: inflation.
...
Of course this is just a silly game.

No, it's not a silly game. I'm continually amazed by the fact that otherwise well-educated people simply don't (or refuse to) understand the time-value of money. Nearly every single DVC "cost" analysis I've ever seen just divides the cost of a points purchase by the number of years on the contract, and calls that the annualized purchase price. The reasons why people refuse to use opportunity cost are many and varied. But, those who insist on not using it are essentially saying that they'd be willing to give me $30,000 today, have me give them back $1,000/year over the next 30 years, and would call it even at the end.

I'll take that deal from as many people as are willing to participate.

As an aside, this is why I'm insisting that my kids take a personal finance class while they are still in high school, and we have these conversations regularly. I didn't really understand this until my Engineering Economics class as an undergraduate, but it was one of the most useful classes I ever took, even though I don't do much financial planning work in my day job. Being able to normalize different instruments in present-value terms is awfully handy when e.g. deciding whether or not to pay points on a mortgage.

If anyone is interested in learning more, a colleague at the Ross School of Business is offering an Introduction to Finance course on Coursera. He's a fantastic instructor, and I suspect the course will be well worth one's time if these ideas are new.

https://www.coursera.org/course/introfinance

 

[Brian Noble]

Anyone else think their average sale prices from 2014 are off? Those just don't come close to what we've seen in the ROFR threads.

I'm going to bet that those are net proceeds after commission.

 

[WilsonFlyer]

The whole time value of money takes into account that the value of money will continue to rise steadily over 30-odd years (in the case of DVC). Were you guys around in the mid 70's and 2008-09?

One could also very easily argue that the time value of money neutralizes over expanded periods of time. I'm not necessarily purveying this view as my own, Just sayin'...

 

[Dean]

I read through the Fidelity article and it's reasonable as far as it goes. It's a generalization and historical approach, one that doesn't have much basis going forward. From when sales started in 1991 DVC retail prices are more than double for the new resort and 50% more for OKW than actual inflation would have predicted looking at retail. Resale is a little lower than predicted compared to retail pricing in this model but is still likely higher than justified based on the lost premium from up front and the shorter RTU. The starting sale price was $48 per point in 1991 if my info is correct, I believe it was $50 pp when the resort actually opened. Maint fees for OKW have also outpaced general inflation but not quite as much as retail prices.

No, it's not a silly game. I'm continually amazed by the fact that otherwise well-educated people simply don't (or refuse to) understand the time-value of money. Nearly every single DVC "cost" analysis I've ever seen just divides the cost of a points purchase by the number of years on the contract, and calls that the annualized purchase price. The reasons why people refuse to use opportunity cost are many and varied. But, those who insist on not using it are essentially saying that they'd be willing to give me $30,000 today, have me give them back $1,000/year over the next 30 years, and would call it even at the end.

I'm with Brian, far too many people throw math out the window and are over the top optimistic when they are evaluating a potential DVC purchase. I think Brian's point can be applied across the board for timeshares in general in a number of ways. One of the largest and most important, IMO, is the assumption that DVC is good and other timeshares are bad. A short list of assumptions just to get us thinking might include the following.

Small contracts will cont to be better to own/easier to sell.
One can cont to make the payments.
One will want to go to Disney every year (or other planned schedule) for the entire length of the contract.
No negative job or other personal changes.
DVC will cont to be viable and a good value.
Even that the parks will be open in 30 years.
We could go on and on.

In effect basically everyone assumes close to best case scenario when buying in with minor variations from the top to the bottom of the thoughts and attitudes. Put another way, even the most pessimistic among us is taking a lot of long term risk and those that are more optimistic/emotional and/or add financial risk by financing and/or having other consumer debt are very often taking a LOT of risk.

 

[Dean]

The whole time value of money takes into account that the value of money will continue to rise steadily over 30-odd years (in the case of DVC). Were you guys around in the mid 70's and 2008-09?

One could also very easily argue that the time value of money neutralizes over expanded periods of time. I'm not necessarily purveying this view as my own, Just sayin'...

Actually the longer view you take the less effect the downturns play. The people who get burned are those that put their eggs in one basket, go in big at the wrong time and that pull out due to fear when things are going down. The one area I'd disagree somewhat with Fidelity and many others on is that it really is an investment in a $$ sense, as a minimum it's a prepaid discount that should save money or add real value long term to be reasonable. Assuming one would go on the vacations anyway there are ways to measure the savings and costs in large part though not as an exact science. I think one of the problems that many make is they say it's vacation and not an investment then they quit doing math, along the lines of Brian's post. It's like when someone buys a car and finances or leases and they add on a bunch of costs they wouldn't do if they were paying cash OOP. This is also why people pay a fair amount more when using CC routinely (roughly 15% more all else equal from what I've seen) than if they used cash/debit cards.

I have no problem with someone who can pay cash, has no other consumer debit and is well on track to retire more than comfortably saying they don't care how much it costs they just want it. Put another way, one would have to be able to throw that amount of money away and not miss it in the long run.

 

[zavandor]

Give the following opening dates and prices (without incentives):
OKW 1991 51
VB 1995 62.75
HHI 1996 62.75
BWV 1996 62.75
VWL 2000 67
BCV 2002 80
SSR 2004 89
AKV 2007 104
BLT 2009 112
VGC 2009 112


Considering inflation, prices at opening would be worth now:
OKW $88.65
VB $97.47
HHI $94.68
BWV $94.68
VWL $92.11
BCV $105.27
SSR $111.54
AKV $118.74
BLT $123.59
VGC $123.59

(I usend the wrong calculator for the first post, these should be corrent)

So here's how much value resorts are worth comparing current resale prices:
VGC 84.66%
BCV 76.31%
VWL 75.06%
BLT 74.52%
BWV 74.46%
OKW 68.79%
SSR 58.70%
AKV 57.92%
HHI 53.35%
VB 43.24%

 

[Dean]

Are those comparisons after commissions and probability of paying some closing. Also are they using sales prices or listing prices?

 

[Brian Noble]

One could also very easily argue that the time value of money neutralizes over expanded periods of time. I'm not necessarily purveying this view as my own, Just sayin'...

One could try, but they would be wrong. As pointed out above, the longer the time horizon---like, say, the many decades of a DVC contract---the less volatile and more predictable the rates.

You have been one of the biggest naysayers when it comes to this question. I'm not entirely sure why, but at least you are consistent.

 

[quinnc19]

No, it's not a silly game. I'm continually amazed by the fact that otherwise well-educated people simply don't (or refuse to) understand the time-value of money. Nearly every single DVC "cost" analysis I've ever seen just divides the cost of a points purchase by the number of years on the contract, and calls that the annualized purchase price. The reasons why people refuse to use opportunity cost are many and varied. But, those who insist on not using it are essentially saying that they'd be willing to give me $30,000 today, have me give them back $1,000/year over the next 30 years, and would call it even at the end.

I'll take that deal from as many people as are willing to participate.

As an aside, this is why I'm insisting that my kids take a personal finance class while they are still in high school, and we have these conversations regularly. I didn't really understand this until my Engineering Economics class as an undergraduate, but it was one of the most useful classes I ever took, even though I don't do much financial planning work in my day job. Being able to normalize different instruments in present-value terms is awfully handy when e.g. deciding whether or not to pay points on a mortgage.

If anyone is interested in learning more, a colleague at the Ross School of Business is offering an Introduction to Finance course on Coursera. He's a fantastic instructor, and I suspect the course will be well worth one's time if these ideas are new.

https://www.coursera.org/course/introfinance

Thanks for posting that. I think most people, including myself, minimize the effects of compounding even if they feel they have considered the time value of money. Watching that has made me more motivated to contribute to my Roth IRA! Also, I didn't know courses for free existed and I am a professor!

 

[davidl81]

Give the following opening dates and prices (without incentives):

So here's how much value resorts are worth comparing current resale prices:
VGC 84,66%
BCV 76,31%
VWL 75,06%
BLT 74,52%
BWV 74,46%
OKW 68,79%
SSR 58,70%
AKV 57,92%
HHI 53,35%
VB 43,24%

Those sales prices look really low, $58 for SSR on average? Even if you add 10 percent for commission that is an average of $64 for SSR. It seems like anything that low would not get past ROFR. And for that to be an average it means there had to be a bunch sell lower than that to make up for all of the $70 plus sales we are seeing.

 

[Brian Noble]

"58.7" is a percentage of current sales value vs. original sales price, expressed in 2014 dollars.

The reported 2014 average resale price for SSR in the Fidelity article is $65.47. Assuming that is the net-proceeds number after a 10% commission, you divide by 0.9 to get the actual average sales price: $72.74. That sounds like it is probably in the ballpark.

 

[davidl81]

"58.7" is a percentage of current sales value vs. original sales price, expressed in 2014 dollars.

The reported 2014 average resale price for SSR in the Fidelity article is $65.47. Assuming that is the net-proceeds number after a 10% commission, you divide by 0.9 to get the actual average sales price: $72.74. That sounds like it is probably in the ballpark.

Ok, the commas threw me off. I thought you were saying $58 and 70percent value. The $72 looks right on.

 

[Brian Noble]

I assumed zavandor was from the EU, where they swap commas and decimal points in numbers.

 

[NARM Forever]

If anyone is interested in learning more, a colleague at the Ross School of Business is offering an Introduction to Finance course on Coursera. He's a fantastic instructor, and I suspect the course will be well worth one's time if these ideas are new.

https://www.coursera.org/course/introfinance

Thank you so much for this reference. I signed up for the course and I'm loving his positivity, what an inspiring man. They are two weeks into the course so I'm going to have to go and do some catching up. All this from reading DISboards

NARM

 

[zavandor]

I assumed zavandor was from the EU, where they swap commas and decimal points in numbers.

You are right, I can blame Excel for that
To make things easier for everyone I've fixed the original post.

However, how to "use" these data?
First of all, we can see that the best performing resorts are the smallest one and those with a great location. Off site and bigger resorts tend to loose more of their value. So it's not hard to guess that VGF should keep its value quite well. Poly has the location but it's a big resort.
No real surprise here.

Second: it's not unreasonable, when calculating if DVC can save money, to assume that the contract can keep at least 50% of its value after 10 years. Of course worst case scenario the contract might be worth nothing, so one should still be ready to take the hit if it happens (for example: do not finance planning to sell it after 5 years and repay remaining debt using the proceedings). And this is for direct prices, resale can be even better.

However we don't have data for the latest resorts, where the price to go direct really skyrocketed in the latest years. The most expensive resort in the list (in today money) was sold at $125 on opening date, can a resort sold at $165 still keep most of its value?

"58.7" is a percentage of current sales value vs. original sales price, expressed in 2014 dollars.

The reported 2014 average resale price for SSR in the Fidelity article is $65.47. Assuming that is the net-proceeds number after a 10% commission, you divide by 0.9 to get the actual average sales price: $72.74. That sounds like it is probably in the ballpark.

I'm not so sure they included the commission. They wrote that it's "Fidelity's DVC resale purchase price for 2014", so it's not how much sellers got.
Also, it's not the current average price, but the average price for 2014. Resale prices have steadily increased in the last year. And, if they calculate it by closing date, contracts closed in January 2014 were probably agreeded in November 2013.

 

[Dean]

Second: it's not unreasonable, when calculating if DVC can save money, to assume that the contract can keep at least 50% of its value after 10 years. Of course worst case scenario the contract might be worth nothing, so one should still be ready to take the hit if it happens (for example: do not finance planning to sell it after 5 years and repay remaining debt using the proceedings). And this is for direct prices, resale can be even better.

I believe that 50% adjusted for inflation is optimistic for a 10 yr value. There is far more downside risk than upside potential at that set point.

 

[Brian Noble]

You are right, I can blame Excel for that
To make things easier for everyone I've fixed the original post.

No worries---many of my colleagues do the same thing, so I'm used to reading it that way. What's more, I've learned to cross my sevens; they just look so much better that way. However, I still don't "swoop" my ones!