Sharing the Pain

HEADS OF STATE FOR TIME

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When 67-year-old Gary Furbee and his wife Rose decided to go shopping for a time-share vacation home in Hawaii, they couldn't believe the bargains. The couple had rented a two-bedroom ocean-view penthouse unit at Marriott's Ko Olina Beach Club on Oahu in 2007, liked it and resolved to watch for resales. The Furbees thought the recession might flush out some distressed sellers, but they were stunned by how far prices had plunged. "At Marriott, it was [listed] for between $50,000 and $60,000, but we paid $18,400," Gary says. He bought their time-share through SellMyTimeshareNow.com one of a number of resale sites. "We don't know if the person was in financial problems or needed the money, but we thought we would take advantage of it."

The Furbees have company. Sales in the once recession-proof vacation-time-share sector have plummeted, and inventory has surged to new highs over the past six months. "It is a buying opportunity," says Mark Lunt, principal of real estate and hospitality transaction advisory services at Ernst & Young. "People are demanding lower prices, and sales folks are slashing prices [by] double digits and offering incentives."

Time-shares allow buyers to lock in the cost of future vacations, which makes them appealing to budget-minded travelers, and they're a less expensive alternative to buying a second home. Las Vegas, Hawaii and Orlando, Fla., have seen the biggest buildup in inventory and are therefore the places most susceptible to discounting.

Sales have also slowed in places where the inventory is limited. "The consumer discounts are affecting everybody--even markets like South Beach [Fla.] and Manhattan are seeing weakness, even though there's almost no supply," notes Lunt. "Everybody's income has gotten less, and prices are resetting."

For now, developers and big-name hotels are trying to avoid chopping the prices of newly built units. They're offering sweeteners such as free spa memberships and extra hotel-reward points. But it's getting tougher for them to compete with the growing number of heavily discounted resale units.

The industry's woes are twofold. First, developers are having a hard time selling new units because of the glut in resales. At the same time, the seized-up credit markets are making it difficult for developers to securitize loans they provide buyers. Defaults on time-share loans climbed to 12% in March from 8% at the end of 2008, which has spooked lenders. This means developers lack cash to lend.

It's a recipe for swift price correction. "What's surprising is how rapid the decline has been," says Scott Berman, U.S. leader of hospitality and leisure consulting at PricewaterhouseCoopers. Even time-shares at top lodging companies are taking hits: Starwood Hotels & Resorts Worldwide reported a 48% decline in revenues from its vacation-ownership business in the fourth quarter, with the average price per unit plunging 31%. Similarly, Marriott International posted a 32% revenue drop in time-share sales. David Loeb, a senior analyst at Robert W. Baird & Co., sees more pain ahead. He projects Starwood's vacation-ownership sales revenues to fall an additional 27% and Marriott's an additional 39% in 2009.