The 2024 World of Finance

What Goes Up Must Come Down Or Keep Going Up Or Stay the Same

The biggest issue concerning money in 2024 is likely to be its cost. Most lenders to the timeshare industry appear to be open for business, offering the types of financing they’ve offered in the past; it’s just going to cost more, since the prime rate is the highest it’s been since early 2001.

Most experts seem to be predicting that rates will go down in 2024, but the main reason a lot of them think rates will go down is that they’ve gone up. Interest rates, however, are not like the apple that fell on Isaac Newton’s head. There are factors that could lead the Federal Reserve to lower rates, one of the most significant being that 2024 is a presidential election year. On the other hand, inflation is far from beaten, as anyone operating a business is aware. During past periods of very high interest rates, virtually none of the experts predicted them accurately, because most forecasts are based on historical patterns, and any unusual movement is a break in the pattern.

I can’t tell you whether interest rates are going to go up, down, or stay the same, but I will advise you not to base your plans on the assumption that rates will go down. It will be helpful if they do, but you should be prepared to weather another year of reduced arbitrage and increased development costs. The timeshare financial model has become heavily dependent on net interest income from consumer notes, and that margin has narrowed significantly the past couple of years. The largest segment of Colebrook’s business is hypothecation lending; in past years, we’ve seen our customers build up significant equity in their pledged portfolios. That’s changed, as a larger percentage of the monthly collections go to interest rather than principal. The majority of our customers are now treading water with their advance rates, in compliance but not building a lot of equity.

Related: 2024 Outlook Brighter

Most developers charge a fixed rate on their consumer notes, so an increase in borrowing costs is a direct hit to the bottom line. Rates on consumer notes haven’t changed materially in decades, but perhaps this is the time to look at them. If you’re close to 20%, there’s probably no room, but if you’re at 14.9% or 15.9%, you might want to think about raising the rate a point or two. A 1-2% increase on a few million dollars in new originations can make a difference in the bottom line.

Since portfolio income is shrinking, it’s probably a good time to look at manageable costs and potential revenue. Can you migrate customers from credit cards to ACH to reduce your credit card fees? Should you charge a higher interest rate for using credit cards? If you don’t charge a monthly service fee, maybe you should. Anything you can do to improve portfolio performance, such as adding customer service reps, will reduce defaults and offset some of the increased interest cost.

While interest rates are depressing arbitrage income, no one is consciously generating less receivables in consequence. On the other hand, higher rates may lead to the delay of new construction projects. In the timeshare industry, where there is a plethora of unsold inventory, new construction may be put on the back burner until the rate environment changes.

Colebrook is active in the origination of loans to Homeowners’ Associations, which are impacted less by interest rates than other factors. The employee crisis of a couple of years ago, while not cured, seems to have ebbed, partially through labor-saving innovations, but the inflation that plagues nearly every aspect of the economy has put upward pressure on wages. Until you see your labor costs leveling off, don’t bet on interest rates going down.

Perhaps the biggest problem for property managers is insurance costs, for both health and property. I’m on Medicare, and my premium went down this year, which is probably bad news for the rest of you. The cost of providing medical care isn’t going down, and if Medicare is reducing the already-inadequate payments made to providers, that means the industry is going to shift more of the excess cost to you. Our company’s premiums roughly doubled in 2024, and while that may be higher than average, everyone seems to be complaining about the cost.

Property insurance is a larger issue for most associations. Everyone is terrified of the expense, and some are fearful they won’t be able to obtain coverage at any price. Oceanfront locations are prime targets for both timeshare development and devastating tropical storms. As historian Frederick Lewis Allen wrote many years ago, tourists who went to Florida to enjoy the cooling ocean breezes enjoyed them less when they learned what a cooling breeze could do when it got a running start from the West Indies. Insurance companies are no less disenchanted, and their rates reflect it.

The solution isn’t apparent. Some talk of self-insuring part of the risk, but if I were a volunteer HOA board member, I would not want the personal liability of making that decision and, in any event, governing documents may prohibit it. One of our former customers is involved with an insurance company that is looking to specialize in timeshare HOA insurance. They’re just starting, and we hope they can be part of the solution.

Related: Looking Ahead

Another one of our product lines is re-purposing, the conversion of older timeshare projects to alternative use. There are a lot of projects in need of conversion and a limited number of companies capable of performing the requisite tedious and detailed legal work. Colebrook can provide the capital, but the key to creating a marketable final product is title insurance, which has become problematic. There’s a lot of work involved in searching thousands of intervals over a 30-40 year span. The optimum solution is to find a local attorney who’s been involved in the formation of the project or the sales process and is familiar with the title history. That’s often impossible, unless the attorney was relatively young on Day One. The other option is to bring in a fresh title company, but many are hesitant to take on such a formidable task. There’s a profit to be made, but it’s a lot easier to crank out title policies on newly constructed inventory. There’s a market opportunity for someone who can find efficiencies. Despite the title bumps, we expect to see more re-purpose activity in 2024. It’s good for the industry, it’s good for re-purposers and, best of all, it’s good for longtime timeshare owners, who often end up with a check that is more than what they paid 40 years ago.

That’s what I see while gazing into my crystal ball for the 2024 world of finance. The jury is out on interest rates, HOAs will be challenged by cost increases and the consequent need to increase fees, and we’re going to see more re-purpose projects. I also predict we’re going to see something I didn’t predict, and the key to success is dealing with those unexpected developments. Bring them on!