Sunday, December 14, 2008

The Las Vegas gravy train has ended

The Las Vegas economic boom of the last decade, much like the broader nationwide housing bubble, was fueled by cheap credit, irrational exuberance and a vision of unending parabolic profits far into the future. Leaders and businessmen, blind to any future economic downturn (remember: Las Vegas was recession proof), continued to play the only card game they knew and each new mega gaming facility had to outdo all of the previous. Thus, billions of investor dollars poured into the city - hoping to catch a splash of the never-ending tidal wave of gaming revenue generated profits, and it worked - for a while.

On the flip side: though this narrow-minded, one-way vision was great for those early enough to catch a ride on the gravy train, it prevented the city from developing any "real" economic diversification and the economy grew ever more dependant on increasing 1) the volume of tourism and 2) their discretionary spending.

Back in March of 2006 I wrote:

The (currently) thriving Las Vegas economy is completely dependent on the discretionary spending of vacationers (Airlines, Hotels, Restaurants, Shows, Gambling, Drinking, Strip Clubs, etc), as the city lacks any real or substantial diversification. Gaming is big money and people have been more than happy to live life to the fullest and part with their cash in a strong U.S. economy. This spending has kept thousands upon thousands of Las Vegans gainfully employed.

But what will happen when the U.S. economy finally starts to contract, when millions of U.S. homes start to lose value, when consumer interest rates rise and payments double on credit cards, when gas & travel become prohibitively more expensive, when the American consumer is finally tapped out and no longer has the discretionary money to gamble away in Vegas?

Answer: Gaming revenues will drop, hotel occupancy rates will fall, and thousands of layoffs will follow.

Those who find themselves unemployed will quickly find that they have very limited options, as the entire hotel & gaming industry will be feeling the same economic pains. The lack of industry diversification in the city will be a killer...

Once the LV layoffs begin, more homes will go into foreclosure, as people won’t be able to make their mortgage payments. Then businesses outside of the casino industry (local restaurants, retail, home improvements, beauty, health care, etc) will also begin to feel the pain. Eventually, a chain reaction of dominoes will begin to fall, and ultimately the number of outbound U-hauls will vastly exceed those inbound...

Back to Today:

Though many gaming industry and community leaders have tried to keep it under wraps for several months now, the long-held Las Vegas secret is finally making it out to the masses: The gravy train has ended and Las Vegas is quickly becoming one of the worst economies in the nation.

- Airline numbers are down/tourism is falling
- Hotel occupancy significantly lower
- Tax revenue is cratering
- Massive State Budget Shortfalls
- #1 in foreclosures for 23rd straight month (1 in 61 houses)
- Top of the list in home price declines
- 1/2 homeowners upside down on mortgage
- Swiftly imploding construction industry
- Major Construction Projects canceled or "On Hold"
- "Official" unemployment rate of 7.6%
- Numerous casinos facing budget shortfalls/bankruptcy

I could go on, but believe the point has been made. The LV economic situation is becoming dire and unless we see a quick rebound in tourism and gaming (highly unlikely), it is destined to get far worse in the months ahead.

With that said, the most recent Gaming report released on December 11th announced Las Vegas Strip gambling revenue fell 26 percent in Oct - the worst report EVER!

Las Vegas Strip - gambling revenue falls 26 pct

"As expected, October was another difficult month for the Las Vegas Strip as the credit crisis took hold and paralyzed consumers," Jacob Oberman, director of gaming research and analysis for CB Richard Ellis, said in an e-mail to clients and investors. "More importantly, housing markets across the nation continue to weaken, which will continue to pressure Las Vegas going forward."

So what can we expect to see in the weeks and months ahead?

Dear readers, many Las Vegas casinos are operating on life-support and though they've been trying to reduce operating expenses/costs in the attempt to pull through to the other side, there currently is no "other side" - not even a glimmer of light at the end of this tunnel, and (I believe) future layoffs are the next big domino to fall...

Though industry personnel cuts have largely been held "under the radar" while quietly picking up steam, we've yet to see the MASSIVE cuts required to keep the industry solvent - this will likley change in the coming weeks and months ahead, as thousands upon thousands of newly unemployed Las Vegans usher in a bleak 2009.

Merry Christmas, Your Fired! Las Vegas Casino Tells Employees

Starting today, lay offs will be the fate of more than 200 Las Vegas Sands Corporation employees.

The company, taking a line straight from Ebeneezer Scrooge, decided that over $6.5 million in bonuses were being cut for 2008. They did not stop there, however, announcing that they would be firing over 200 employees right before the holidays.

On Friday, employees will begin to be notified that their childrens' Chirstmas would become a product of the slow economy. Employees who have been with the company for years will be told they no longer have jobs.

"To do this right before the holidays shows just how desperate Las Vegas Sands has become. They have now tipped their hand on just how much danger they are in, and it will hurt them dearly with their investors," said financial analyst Thomas Drowley.

Sands was quick to try and diffuse the situation through the media, trying to ensure customers that their casinos are still up and running. "It won't impact the customer experience at our properties," said spokesman Ron Reese.

What it will impact is the families of 216 workers. Many of these workers have already spent money for the holidays, and now they will be struggling to pay their bills.

In closing, I'd like to leave you with a few more words that I wrote in 2006:

When tourism starts to wane, due to people running out of discretionary cash, gaming/hotel industry layoffs will follow, cascading the impacts of the already doomed Valley housing market, as more locals will be unable to meet their monthly mortgage obligations. Reduced spending levels, increasing layoffs, magnified home foreclosures and tightening credit conditions will cause a doubly painful domino effect on the commercial real estate markets and retail sectors and in due time, the impacts will be extremely painful to the entire economy. State tax revenue will tank, crys for budget cuts will prevail and the government layoffs to follow will only exacerbate/compound the situation.

Yes dear readers - the gravy train has ended for Las Vegas and I expect unemployment to be brutal in 2009 - the next big domino to fall!

Chart below:

Las Vegas Unemployment data as extracted from the BLS on Dec 14th 2008. Note: Though spiking upwards, these numbers are severely understated through the use of U-3 data - Click here for more info: Unemployment Rate Reality

Bottom line: Doubling the stated figures below will bring you much closer to the real unemployment rate truth.




Mberenis said...

Grrrrrrrrrreat blog!!!

Don't let the recession get you down. When was the last time you looked at government grants? With the bailout, there is more money than ever. Don't miss out.

My Grant Blog

olecapt said...

Ohhh..Would you rather be in Flint? Detroit? Milwaukee? Cleveland? Rochester? Indianapolis? Syracuse? Buffalo? Newark? Scranton?

Silliness. Las Vegas suffers when the economy goes south. Comes with the nature of the place.

It will recover and survive. There will be lots of belt tightening and adoption. But it will survive and prosper as things take off again.

Randy said...

OLECAP the Las Vegas realtor, glad you stopped in with a comment.

It's really too bad you don't realize how bad things will get and then how long the recovery will take - we're looking at a decade or better of misery and 10 million or more (nationwide) who lose their homes.

As stated previously, here in LV we will see $60SF median home prices before all is said and done.

olecapt said...

You quote a statistic that half of the homeowners in Las Vegas are underwater. Got a source for that? I find it unbelieveable. The counter is that well over 80% of the home owners in Las Vegas were there prior to 2004. As far as I can see there is no indication that everyone refied.

I don't see $60 PSF. But I can certainly see $80. Then again the PSF has been trending up the last few weeks.

Going to be an interesting year.

Anonymous said...

Ah, expectations!!!

There is no more doomed city in america than LV. Get out while you can. Water, problem no. 1. Economy, the killer. Things change, and when they change drastically, there's no going back. In 10 years there will be no LV.

Peak oil... and don't you forget it!!!

OperationNorthwoods said...


An interesting year? How about an interesting decade? Kind of like Russia had after the fall of the USSR.

Also, were over 80% of current homeowners in Vegas with a house they owned by 2003? I thought there was strong growth from 2004-2007.

One concern I have about your upbeat forecast is that I don't know if people can grow gardens and do without air conditioning. Of course, Detroit may not do well, either. But this could just be like the 1930's, where folks left the Dust Bowl.

Randy said...


Here's a link:

1/2 LV Homeowners Upside Down

According to Zillow 99.4 percent of LV homes lost value in the past year.

Among the report's other findings:

- More than 48 percent of homes sold in the Las Vegas area in the second quarter of 2008 were foreclosures.

- About 70 percent of homeowners who purchased their homes in 2005, 2006 or 2007 have negative equity in their home. For example, about 73 percent of homes purchased in 2006 have negative equity, with homeowners having median equity of minus $52,444.

Here's another:

Thousands of Valley Residents Upside Down in Mortgages

In fact, the Center for Business and Economic Research says about 50-percent of all homeowners in Nevada are upside down. That means half of the homes are now worth less than the mortgage.

Virtually all neighborhoods in the Las Vegas area show the signs of recession. In some cases, 30-percent of the homes in a neighborhood sit in foreclosure. The huge number of them pulled prices down 34-percent from the peak house value. Nevada ranks second in the nation, only to Phoenix, in that category.

And one more: Nevada has top rate of upside-down mortgages

Almost half of Nevada homeowners with a mortgage owe more to the bank than their homes are worth.

Moreover, if you add in homeowners like them in California, Arizona, Florida, Georgia and Michigan, they account for nearly 60 percent of all homeowners who are "underwater" on their mortgages.

Nationwide, almost one of every five homeowners with a mortgage owes more to their lender than their property is worth

Anonymous said...

Don't include Scranton in your list of crappy polaces. I live there and it is a wonderful town. Nice people and a low crime rate.

Anonymous said...

I don't know much about Vegas: cigars, schmaltz, garish nudity, money, booze.

It excites me to see drama and collapse, wealth and poverty.

This is an action town: boom to bust!

I love it!

Anonymous said...

Going by the latest reports regarding the hotels in Bangalore, the hospitality industry of the city is about to see serious growth and development in the coming times. Bangalore was one of the cities that had seen unprecedented growth and development owing to the boom of the IT sector and before long it became one of the most important IT hubs of not only India but also of the world. As such the number of business travelers to Bangalore also increased and hence important names in the hospitality industry opened up exclusive business hotels in Bangalore. Soon Bangalore became one of the most important commercial hubs of India and hence it saw rapid infrastructural growth and development. However, following the economic slump, not only the IT sector and overall business suffered, but also the hospitality sector received setback. Most obviously the occupancy rates for the budget hotels in Bangalore declined. However, the recent reports predict that India is still the place to be as far as development from all ends in concerned. Business will soon be bustling in India and the hospitality industry has also somewhat overcome the slump and the reports predicting growth have come as a breather.

Benedict said...

No doubt, the writer is completely right.
fjord du saguenay


That statement sums the situation up.