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Is Vegas the New Detroit?
05/12/2011 11:25 am EST
The Great Recession brought us all down, but these two cities hardest of all—and the last two years have been a shameful morning after for the Sin City, writes MoneyShow editor-at-large Howard R. Gold.
It was big news five years ago when Macau, the gambling mecca near Hong Kong, surpassed the Las Vegas Strip in gambling revenues.
It’s no longer even close: Macau’s gambling revenues were four times those of the Strip in 2010.
Macau’s gains have come in the years since Las Vegas’s housing and building boom turned to dust.
Home prices here have fallen 58.1% from their 2006 highs, the most in the Standard & Poor’s/Case-Shiller 20-City Composite Home Price index. They’ve even lost 12.6% from the nationwide recession low in April 2009—again, the worst performance of the cities in the index.
The median home sale price in the Las Vegas area at the 2006 peak was $313,500; in 2010, that fell to a stunning $138,100, according to the National Association of Realtors.
Currently more than 70% of the homes in the area are under water, meaning their value is worth less than the amount owed on the mortgage, according to Stephen Miller, chairman of the economics department at the College of Business at the University of Nevada, Las Vegas (UNLV). Nationwide, it’s around 28%.
A recent Forbes survey named Las Vegas the nation’s second worst performing housing market of the past decade.
The worst? Detroit.
A House of Cards, Imported from Detroit
That’s not the only thing Sin City has in common with the Motor City, although on the surface no two metropolises are more different (and I can guarantee that Detroit doesn’t have a hotel as cool as Vegas’s new Cosmopolitan).
Detroit was a manufacturing powerhouse that has been in decline for decades. Las Vegas was the prototypical boomtown: Clark County, in which Las Vegas is located, grew by about 40% in the last decade, pushing its population to nearly 2 million.
Detroit is gritty, Vegas is glitzy. What happens in Vegas stays in Vegas, and what happens in Detroit...well, who cares?
And yet there are striking parallels.
Robert Lang, director of Brookings Mountain West, a think tank affiliated with UNLV, said Las Vegas “has become a modern-day version of Pittsburgh or Detroit, which once relied on one sector for its growth to its detriment,” The Las Vegas Sun reported.
He “compared Las Vegas to Midwestern and Northeastern cities with manufacturing plants and steel mills where the middle class had high-paying jobs, only to see those plants disappear.”
The industry that defined Vegas, of course, was gambling.
“We’re a one-horse town, and gaming is driving the economy,” said Professor Miller of UNLV.
Vegas hotels and casinos employed 155,200 people in March, according to the Nevada Department of Employment, Training, and Rehabilitation. That’s almost 20% of total employment.
With an economy so dependent on tourism, it’s no wonder Nevada had the biggest drop in GDP of all states during the recession—6.4%. Two years ago, casinos had rows of empty, silent slot machines, and cabbies sat in long queues, waiting for fares that never came.
But what really clobbered Las Vegas this time was the housing bubble and bust. Las Vegas’s boom was years in the making, but its unraveling happened almost overnight.
Posh new megacasino hotels like the Bellagio, the Venetian, and Wynn Las Vegas made the Strip a hot destination for upscale tourists and conventioneers. Celebrity chefs like Wolfgang Puck, Emeril Lagasse, Charlie Palmer, and Joel Robuchon brought Michelin stars—and mind-boggling tabs—to the land of all-you-can-eat buffets.
The Strip’s boom was a boon for employment as well.
NEXT: The Housing Boom and Bust|pagebreak|
Meanwhile, a steady stream of retirees descended on the city, lured by warm weather, no state income taxes, and cheap housing. A couple could sell their home in Southern California for, say, $800,000 or $1 million and buy a similar or larger house in the Vegas area for less than half the price.
As the population grew, contractors, developers, and realtors smelled opportunity, and mortgage bankers smelled blood. Las Vegas became ground zero for the worst subprime slime: liars’ loans, insane teaser rates, option ARMs, and rampant fraud.
The market crashed hard, and Las Vegas residents are still picking through the rubble. An astonishing 86% of homes and condos under contract in Vegas and nearby Henderson were foreclosures or “short sales,” where banks sell a property for less than the value of the mortgage.
But the market may be starting to bottom. Inventory is shrinking a bit, though more desperate homeowners will put out the for-sale signs at the first inklings of improvement.
Meanwhile, joblessness in Las Vegas hovers just above 13%, near the bottom of all US metropolitan areas. That’s actually down a lot from last September, when Sin City hit a record 15% official unemployment rate.
And commercial real estate remains in a deep funk. The massive $8.5-billion CityCenter project may have barely averted bankruptcy, but owners MGM Resorts International (MGM) and Dubai World had to write down its value by more than $5 billion.
Beyond the Strip, it’s pretty hopeless. Office vacancy rates in some areas are as high as 40%, while retail vacancy rates are above 11%. Don’t expect any recovery there for many, many years.
That’s why people who came here during the boom are now, well, leaving Las Vegas.
“We lost over 60% of the construction jobs during the recession,” says Professor Miller. “The real unknown factor is how many of the construction workers who want jobs have left the state.”
Last year Nevada reported its first population decline in 90 years, as 70,000 more people left the state than came here. Demographers look for that trend to continue.
But things may be looking up a bit.
It’s pretty crowded here at Caesars Palace, where I’m appearing at the Las Vegas Money Show, and I had to wait half an hour on a long, twisting line to get a cab at McCarran International Airport. On Wednesday night the Strip was buzzing with tourists.
The Las Vegas Convention and Visitors Authority reports that visitors are up 5% so far this year, convention attendance has risen by over 10%, and hotel room rates have increased by nearly 10%.
That’s good news, but this city and state are in for a long, tough slog. A deep deficit of $1.5 billion—45% of the total budget, again the worst in the nation— means the state of Nevada won’t be able to help much.
So, construction is dead for now, and gambling and tourism could remain weak as long as gasoline prices and national unemployment are high. With those twin pillars of Las Vegas’s growth no longer thriving, the lights on the Strip will glitter less brightly for some time.
Motor City, here we come?
Howard R. Gold is editor at large for MoneyShow.com and a columnist at MarketWatch. Follow him on Twitter @howardrgold, and read more columns and watch his videos at www.howardrgold.com. His new political Web site, The Independent Agenda, will launch soon.
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