Recession Question

[supersnoop]

Sorry, i was just asking for POV not stating that they do iuse ROFR’s to prop up resale prices. I have no idea. I was just curious if they would do it and asking the board

I also didn’t mean they would prop up resale prices for the benefit of owners.

That being said, if Disney has a brand new DVC property coming online (which seems like they will every two years) and Grand Floridian is tanking and can be had for 50% of current prices, it seems like there is a legit strategy on their part to prop up the prices of comparable resale properties (through ROFR) to make the direct purchases more attractive. I have no idea if they do this, but just saying its reasonable for them to manipulate the market to benefit their directly purchase revenue.

If we’re in a recession and prices and tanking and Disney is having trouble selling the newest resort, where are they going to get the money to “prop up” the resale market? They’ll be hit as hard (if not more so) as the rest of the economy.

 

[Bing Showei]

There are ways to do so. You just have to create enough hassle, smoke & mirrors and real lost options to do so. Plus you have to change the sales approach. Even companies you can buy for pennies on the dollar can sell consistently at retail prices. Additional fees and the qualified vs non qualified will make a difference and the more aggressive it is the more difference it'll make. The fees on a Marriott Trust Points purchase can literally be half the cost but you do get a fully functional purchase. There are lots of things they can do they haven't done though some (not all) are different than their past philosophy. A VIP system is something they could add to the mix as well but at this "late date", I doubt they will. Don't let anyone tell you they can't though but there would be hurdles.

Right but hat factors into the function of the product. If a VIP system were introduced that fundamentally alters the product (say priority with booking is given to direct purchases ONLY) I would argue that beyond just the member benefits angle, DVD is creating a different product line.

Resale, as it functions now, allows an owner to book a room exactly as a direct buyer would for those same points, and at the end of the day, getting that room is (or should be) why people buy.

 

[Jerry5788]

As annoying as resale can be, there is no way DVD would be able to move retail with a significant differential in cost. The economics would need to be compelling enough that buying, say CCV is worth that difference. Benefits factor into that equation, but price difference will be the most compelling driver.

I’m not sure if you’re suggesting DVD does not prop up prices, or if you’re saying DVD does not do it for the benefit of the owners (which I agree, they don’t). But closing that price gap is exactly what they need to do to keep from devaluing their product. And they do this by artificially driving up prices for resale, absent ROFR, I’m certain that a truly free market would not support current DVC resale prices.

I agree maybe they won't support prices during recession but have you seen how ROFR has raised prices over past year.

 

[Dean]

Right but hat factors into the function of the product. If a VIP system were introduced that fundamentally alters the product (say priority with booking is given to direct purchases ONLY) I would argue that beyond just the member benefits angle, DVD is creating a different product line.

Resale, as it functions now, allows an owner to book a room exactly as a direct buyer would for those same points, and at the end of the day, getting that room is (or should be) why people buy.

I agree in principle but timeshares are an emotional product so simple logic often doesn't hold true. You can argue they can't do it without the existing system and I can see contractual language to support that but I will tell you that the 100% control over reservations without input gives a lot of latitude. Plus at least 3 timeshare systems have added or increased VIP options and/or altered reservation priorities integral to their system that are based on FL (Marriott, Bluegreen, Wyndham).

 

[chalee94]

As annoying as resale can be, there is no way DVD would be able to move retail with a significant differential in cost. The economics would need to be compelling enough that buying, say CCV is worth that difference. Benefits factor into that equation, but price difference will be the most compelling driver.

I’m not sure if you’re suggesting DVD does not prop up prices, or if you’re saying DVD does not do it for the benefit of the owners (which I agree, they don’t). But closing that price gap is exactly what they need to do to keep from devaluing their product. And they do this by artificially driving up prices for resale, absent ROFR, I’m certain that a truly free market would not support current DVC resale prices.

Many timeshares sell for $1 at resale compared to thousands of dollars at direct pricing. Even with DVC, too many people are happy to believe their DVC guide without consulting the DISBOARDS or TUG. Most people aren't doing a cash flow analysis before buying.

But even if we are talking about savvy buyers, it sounds like you think if Disney were having trouble selling Aulani because it is overpriced, just overpaying to scoop up some resales (that become inventory that they would also struggle to sell) would be enough to convince potential buyers that it is a good deal. That fails the logic test for me.

If AKV is worth $110 per point to me, I might adjust an offer a smidge to $112 if I thought it would help me avoid ROFR - but if I only valued AKV at $80, ROFR would be a complete nonissue. I might offer $80 or I might drop out of the market. But the notion that ROFR activity would compel a savvy buyer to offer a big premium "just because" makes no sense.

In a good economy, DVC is worth more than in a recession. Even in a recession with no ROFR activity, prices didn't go to zero and still varied by resort because supply and demand fundamentally determine the pricing (along with cash flow analysis from renting and comparing onsite alternatives - which would also be lower in a recession).

If "a truly free market would not support current DVC resale prices", then educated buyers would drop out of the market. No one is forcing people to buy...

 

[Jerry5788]

Many timeshares sell for $1 at resale compared to thousands of dollars at direct pricing. Even with DVC, too many people are happy to believe their DVC guide without consulting the DISBOARDS or TUG. Most people aren't doing a cash flow analysis before buying.

But even if we are talking about savvy buyers, it sounds like you think if Disney were having trouble selling Aulani because it is overpriced, just overpaying to scoop up some resales (that become inventory that they would also struggle to sell) would be enough to convince potential buyers that it is a good deal. That fails the logic test for me.

If AKV is worth $110 per point to me, I might adjust an offer a smidge to $112 if I thought it would help me avoid ROFR - but if I only valued AKV at $80, ROFR would be a complete nonissue. I might offer $80 or I might drop out of the market. But the notion that ROFR activity would compel a savvy buyer to offer a big premium "just because" makes no sense.

In a good economy, DVC is worth more than in a recession. Even in a recession with no ROFR activity, prices didn't go to zero and still varied by resort because supply and demand fundamentally determine the pricing (along with cash flow analysis from renting and comparing onsite alternatives - which would also be lower in a recession).

If "a truly free market would not support current DVC resale prices", then educated buyers would drop out of the market. No one is forcing people to buy...

I am still confused ROFR clearly props up prices in resorts. Maybe it shakes some people out of the market but obviously not everyone. What else do you attribute the SSR price move from passing ROFR in mid $80 to start the year to closer to $100 to get passed ROFR today. Do you think there has been that much increased actual demand in resale market to raise prices that high? Or that these buy backs is because Disney is selling so much SSR direct?

Also there is a price where even if Disney doesn't have the direct sale buyer lined up they can simply rent the rooms to cash buyers. Those returns might be attractive to them until they get a buyer.

 

[sky2823]

I agree on the SSR increase being an example of potentially propping up the market through rofr

I think the SSR buyer is the savvy disboards buyer who probably would go direct as opposed to paying 150 for SSR.

Disney increasing the ROFR price on SSR by 20 pts over the last year doesn’t seem like it would correlate to higher direct purchase demand for SSR.

 

[Matty B13]

Several of the brokers have been pushing up the list prices of all resorts with the new pricing that DVC put out at the beginning of the year, it wasn't just ROFR.

 

[Dean]

I am still confused ROFR clearly props up prices in resorts. Maybe it shakes some people out of the market but obviously not everyone. What else do you attribute the SSR price move from passing ROFR in mid $80 to start the year to closer to $100 to get passed ROFR today. Do you think there has been that much increased actual demand in resale market to raise prices that high? Or that these buy backs is because Disney is selling so much SSR direct?

Also there is a price where even if Disney doesn't have the direct sale buyer lined up they can simply rent the rooms to cash buyers. Those returns might be attractive to them until they get a buyer.

Clearly it does but it's a by product not a prime focus. IMO DVC has always been more about emotion and hype than reason. It's basically like a hot real estate market anywhere except you don't have to have it like you might a home in a given area. DVC won't make as much money on SSR even at a ROFR of $80 compared to selling retail.

Several of the brokers have been pushing up the list prices of all resorts with the new pricing that DVC put out at the beginning of the year, it wasn't just ROFR.

This has always been true to some degree. I know there's one company that's refused certain listings that were lower than the "market". Historically they've likely done more to keep resale prices up than ROFR has.

 

[Jerry5788]

Clearly it does but it's a by product not a prime focus. IMO DVC has always been more about emotion and hype than reason. It's basically like a hot real estate market anywhere except you don't have to have it like you might a home in a given area. DVC won't make as much money on SSR even at a ROFR of $80 compared to selling retail.

This has always been true to some degree. I know there's one company that's refused certain listings that were lower than the "market". Historically they've likely done more to keep resale prices up than ROFR has.

Agree with you not a focus of Disney - feel the ROFR has been more active in pushing prices up ahead of Grand Riviera and possibly other moderate DVC resorts they might want to build. But who knows how the mouse really thinks

 

[Bing Showei]

But even if we are talking about savvy buyers, it sounds like you think if Disney were having trouble selling Aulani because it is overpriced, just overpaying to scoop up some resales (that become inventory that they would also struggle to sell) would be enough to convince potential buyers that it is a good deal. That fails the logic test for me.

You are making two separate points here. I absolutely do believe that if it were a viable approach to moving more AUL retail, Disney would buy up resale to push it closer to retail, closing that gap. I believe this to be true of any actively selling resort. But given the issues AUL has with selling, beyond just the price, I don't think anyone believes this would be a viable choice for DVD.

But the AUL case in not a strong argument that DVD is not propping prices up.

Are you actually suggesting that Disney does not artificially support the price floors on resale? That prices would be where they are if ROFR did not exist?

I could see this argument for VGC, but I would maintain that resale prices are where they are not because consumers feel that SSR is worth $100/point, but rather, DVD keeps taking contracts below this point and in turn, people start offering $2 more on this contract because it may pass ROFR. Soon, that $2 more isn't enough and we see those prices continue to climb. Look at the ROFR board. How many times have you read, "It's more than I wanted to pay, but hopefully this makes it past this time." Brokers have certainly played the angle that, "You can offer this, but it won't make it through ROFR."

DVD has SSR readily available now and they have for several months. At one point, for a March UY in particular there were hundreds of points available immediately, no waitlist, and DVD continued to ROFR March SSR for several hundred more points (based on the ROFR board sampling alone).

If a seller were willing to sell CCV at $120/point, and a buyer were willing to pay that, would you think DVD would let that pass ROFR? And if not, why not? Because it's cheap points for a resort that is still not completely undeclared? For every contract that has been grabbed by Disney via ROFR, the market has said, this is what the buyer is willing to pay, and this is what the seller was willing to sell for, and Disney has asserted otherwise. That is textbook market manipulation.

 

[sky2823]

Blue Horseshoe loves Boardwalk Villas

 

[chalee94]

Are you actually suggesting that Disney does not artificially support the price floors on resale? That prices would be where they are if ROFR did not exist?

I think I stated that clearly. The weird part to me is that you are actually saying that while there are legitimate buyers out there who demonstrate a willingness to pay $100 per pt for SSR, you think that (without ROFR) sellers are all sweet and gentle creatures who would blush at asking more than $80.

ROFR only works if you have legitimate buyers who are willing to pay those $100 prices in the first place. Disney is not a separate bidder. If there are a lot of buyers at $100, then that is probably where supply and demand intersect. There may be a correlation with ROFR but you're whiffing on the causation.

I absolutely do believe that if it were a viable approach to moving more AUL retail, Disney would buy up resale to push it closer to retail, closing that gap. I believe this to be true of any actively selling resort. But given the issues AUL has with selling, beyond just the price...

Sounds like you would concede that Aulani's pricing and value reflect economic demand but not the onsite resorts? While demand is much higher for the onsite resorts, they do not exist in a completely different dimension economically.

DVD has SSR readily available now and they have for several months. At one point, for a March UY in particular there were hundreds of points available immediately, no waitlist, and DVD continued to ROFR March SSR for several hundred more points (based on the ROFR board sampling alone).

So? It goes back to cash flow analysis and that Disney has better information than we do. If Disney can rent SSR easily and for close to rack rate, then yes, it will ROFR at a higher price point. Not to drive resale prices higher but because of the actual underlying economic value. If Disney were renting every Aulani room for rack rate, I would guarantee they would find the money to ROFR more AUL contracts.

I do not believe that Disney is taking SSR contracts simply to sit unsold in inventory and unused in the cash rental market, in hopes that more people will buy CCV.

The economy has been rolling, unemployment is at record lows, and tax reform and a relatively high stock market have people willing to spend. And again, Disney has better information while the DVC resale market is not efficient, so it takes time for asking and offer prices to adjust.

In the event of a major economic change, Disney will probably recognize it earlier than most of us (as in 2008) and drop ROFR as demand collapses. And the owners who expected Disney to prop up their resale values will get crushed again...

 

[sky2823]

I’m not sure typical rules of supply and demand work in the DVC resale market

In this case, the “invisible hand” wears a white glove.

 

[Jerry5788]

I do not believe that Disney is taking SSR contracts simply to sit unsold in inventory and unused in the cash rental market, in hopes that more people will buy CCV.

The economy has been rolling, unemployment is at record lows, and tax reform and a relatively high stock market have people willing to spend. And again, Disney has better information while the DVC resale market is not efficient, so it takes time for asking and offer prices to adjust.

In the event of a major economic change, Disney will probably recognize it earlier than most of us (as in 2008) and drop ROFR as demand collapses. And the owners who expected Disney to prop up their resale values will get crushed again...

I mean do you think Disney demand (cash rate) has changed so much that Disney was letting SSR pass at $85 per point but now won't allow passing if its below $95? I think Disney is renting these out for cash but I don't think the returns/demands/economics have changed so much that the ROI would justify the 12% increase. They are clearly propping up the prices and yes by taking off supply from market they move prices up because demand is the same. And at the end of the day 12% price for a buyer is not much difference in absolute terms (relative to total purchase price) and from breakeven is only 1 more year often.

 

[Bing Showei]

I think I stated that clearly. The weird part to me is that you are actually saying that while there are legitimate buyers out there who demonstrate a willingness to pay $100 per pt for SSR, you think that (without ROFR) sellers are all sweet and gentle creatures who would blush at asking more than $80.

You seem inclined to take a point I make and magnify it wildly to some strange extreme. It makes having a reasonable conversation around the point I'm making a bit challenging, as I'm not convinced you understand what I'm trying to say. While I understand the need to distort what I'm actually suggesting to allow for a strawman argument to function, I'm a bit flummoxed as to how to actually address what our disagreement seems to be.

As I understand them, they are that:

You feel that the DVC resale market actually is a free market with ROFR not having much of an affect on prices.

I feel that ROFR actually sets the market floor in an artificial way that absent ROFR, prices would drop.

You feel DVD is simply looking for cheap points and has zero interest in supporting the price of its product.

I feel that if resale prices drop too low, it would make the argument for retail a hard one for the DVC Guides, member benefits notwithstanding.

On the latter two points, you have quite a generous opinion on DVD's motives in this respect. I see ROFR as much more proactive than reactive, as you seem to believe. Absent inside information on the thinking behind ROFR, it feels like our disagreement around why DVD does what it does is an academic one and we can agree that we wont' see eye to eye there.

On the former, you never addressed the point I made earlier that every time DVD steps in to take a contract via ROFR, that they are effectively setting a floor. While I don't think the owner was a "sweet and gentle creature" who blushed when I offered, and he accepted, an $85/point offer on an SSR contract with all points from 2017 forward, he worked with me to establish market value. $85/point. That was the price the market would bear. A seller willing to sell at that price. A buyer willing to buy at that price. But DVD stepped in and said, "No. This is not what these points are worth. These points are worth more than this." And that message echoes across the DVC landscape. Buyers on this board see where the floor is. Brokers happily hold it up to proclaim, "This is what the market will bear, so this is what we recommend our sellers sell for." I'm not sure how you see that this represents a free market absent of Disney's manipulation of prices.

The disconnect, I think, is that people like sky2823, Jerry5788, and me have been following the resale contracts over the last six months and we can attest first hand to the market reacting to ROFR in practice. I've had three separate conversations with three different brokers specifically around how ROFR will not allow my offer to pass. More specifically, people like Jerry and I are shameless lowballers and will constantly test where that floor is. If ROFR didn't exist, buyers would be much more encouraged by some of the deals Jerry has been able to enter into contract on and would in turn make similar offers.

There is no question this would affect market prices. I'm not sure I understand how you can argue otherwise.

 

[Dean]

I’m not sure typical rules of supply and demand work in the DVC resale market

In this case, the “invisible hand” wears a white glove.

Market forces don't work well in general with timeshares, it's far too much of a specialized item to do so. It's like selling a collectible that's not mainstream. ROFR is only part of it and I'd guesstimate that about 50% fo the time historically, ROFR hasn't had much impact.

 

[DougEMG]

To me it does seem that ROFR provides a market floor when Disney is actively exercising their ROFR. When buyers see contracts being taken, they typically then look to increase their offers in order to try and pass ROFR.

However, Disney has not always been active with ROFR. In the last recession, there was virtually no ROFR happening and prices dropped without that floor. On one contract I ended up paying $50/point for a 200 point SSR contract that came with 600 points all I paid was closing, no MF. That had an effective cost of $21.50/point for me. Now if Disney were ROFR anything, they should have taken that, but they didn't. So the market can go very low when people are desperate and no ROFR is happening.

Right now demand and hence prices are high, so it is easy for Disney to use a little ROFR to keep resale prices higher than normal.

 

[KAT4DISNEY]

I think I stated that clearly. The weird part to me is that you are actually saying that while there are legitimate buyers out there who demonstrate a willingness to pay $100 per pt for SSR, you think that (without ROFR) sellers are all sweet and gentle creatures who would blush at asking more than $80.

Something along those lines did actually happen recently. If you were on the ROFR thread you would have noted that the majority of SSR and AKV contracts were being taken back by DVC. So, the solution? Brokers recommended sellers raise the price they were selling for and buyers started offering higher.

 

[ELMC]

While ROFR activity can have influence on the price floor, I think it is a bit of a stretch to draw a direct correlation and ignore the multitude of other factors. I have been active in the resale market for the past six years and I have seen a significant number of instances where a lower priced contract passed ROFR and a similarly structured (UY, available points, etc.) contract at a higher price did not. The existence of ROFR has an impact, but I wouldn't go so far as to say that resale prices would plummet in the absence of ROFR. The plummeting prices and lack of ROFR activity during the last recession is a classic chicken and the egg situation, although I would suggest that it was the economic downturn that forced prices lower and the lack of ROFR activity came afterwards. Regardless, in the current market the laws of supply and demand are still at play, even if not as purely as they exist in theory.