Medallions, Tulips and Trends

The following appeared in the Chicago Dispatcher, November 2006

Medallions, Tulips and Trends
By George Lutfallah

Before you jump on the speculative bandwagon that has medallion prices going through the roof in the near future, take a step back and ask yourself what the price of a medallion should be. Why are prices going up? Is there some fundamental change in the industry that is increasing the cash flow to these medallion prices? Certainly the additional revenue from advertising has an impact on cash flow to medallion owners. Increased competition in insurance providers also should have an impact on the bottom line. But there is also a lot of demand currently for Chicago medallions that I suspect may have to do more with speculation than fundamentals. In other words, part of the reason prices may be going up is that there are more and more investors who are in pursuit of Chicago medallions because they are of the belief that prices will continue to go up and they don’t want to miss out on the opportunity to get it while they consider prices to still be relatively low. There are also investors out there who may be jockeying for market share which may lead to the overvaluation of medallions.

The point is that if you’re considering buying a medallion, especially if you’re a driver looking to buy your first medallion, my advice is to not look at the trends in prices but to sit down with a pencil and paper and see if it makes financial sense to you. You are not going to corner the market in Chicago medallions so don’t get caught up in the competition with others who may be operating under that mindset. Figure out your average revenue and expenses. When you have a good estimation of your positive cash flow, ask yourself the following question: Am I better off buying a Chicago medallion at the current price I can get it for or should I invest my money in something else? I am totally in favor of drivers owning their own medallions. But don’t just jump in because of what you think medallion prices will do based on the buzz. Sure, prices may continue to go up. As you’ll see below there has been a general trend upward in medallion prices. But I don’t advocate looking at trends or following the crowd.

That’s the kind of thinking that got a lot of Dutch people in trouble in the early 1600s when seemingly everyone got the idea that tulip bulbs (yes, that’s right, the flower) were climbing to astronomical prices. Between 1634 and 1637, people were actually selling their property just to get their hands on these Tulip bulbs because the prices kept rising and, to many Dutchmen at the time, there was no end in sight. People who had sold their tulip bulbs were kicking themselves when they saw the prices of tulips continue to rise and they desperately tried to get back into the tulip business. In the book, “A Random Walk Down Wall Street,” by Burton G. Malkiel, one excerpt reads, “Everyone imagined that the passion for tulips would last forever and buyers from all over the world would come to Holland and pay whatever prices were asked for them.” Have you heard similar claims about Chicago medallions and how wealthy New Yorkers will continue to come here and keep bidding the prices up? Now I’m not saying that the rise in Chicago medallion prices is necessarily as silly as the rise in tulip bulb prices but I want to point out the similar type of thinking that could cause some investors to fall into a trap.

In Holland, of course the tulip craze ended and prices dropped to the floor which sent a shock throughout their whole economy leading to a “prolonged depression.”

Yes, medallion prices may continue to rise. They might also go down. We all know the story of the owners out there who bought medallions a few years back when prices were high only to see their investments tank. And they tanked for two primary reasons. First, they were overleveraged (Meaning they took on too big of a loan which made it difficult for them to make their payments). Second, 9/11 happened which sent a huge shock to the industry and further depressed the ability of many owners to service their loans. At the end of the day, what drives medallion values is the cash flow that starts with taxicab passengers who pay the driver who pays the owner. Advertisers are another source of cash to the owners. There are lots of other factors that I won’t get into here now but you get the idea. Look at the fundamentals. Did the population of Chicago explode? Are we gaining huge convention business? How much will the advertising revenue grow? These are the fundamental types of questions you have to ask yourself before making your investment decision. Grab a pencil and paper and go through the fundamentals. Think about what that medallion is worth to you and don’t base your decision on the belief that somebody may want to pay you more for it down the line. Remember, oftentimes the “winner” of an auction paid too much. Analyze. Don’t speculate.

Medallion prices may be depressed and they may be worth more than they were selling for historically. The prices may continue to rise. How much, if at all, is for you to figure out. But just don’t base your decision on trends. After all, there was a trend in tulip bulbs in Holland 400 years ago.

Here’s some information to help get you started, courtesy of the Department of Consumer Services: 2006 Medallion Prices

The Department of Consumer Services reported 939 medallion sales from January 3, 2006 and October 26, 2006. The average selling price of these medallions was $49,152 and the median selling price was $48,000. The highest price paid was $66,250 on July 31. The lowest reported price paid was $350 which the Department of Consumer Services says was possibly more of a transfer between family members. The second lowest price paid was $20,000 on March 15. The prices reported may include wheelchair accessible medallions which would presumably bring the average sales price down as wheelchair accessible medallions typically sell at a discount to unrestricted medallions.

Of the 939 medallions sold during the period, 60 had sold for $60,000 or more and of those 60 medallions, 55 of them were sold for exactly $61,750 with the bulk of these sales occurring on August 30.