Las Vegas Nevada: December 2008 Economic Snapshot
Unemployment hits 25-year high
New jobs coming to Wynn Encore and CityCenter are sorely needed in Nevada, where the unemployment rate hit 8 percent in November, the highest level since February 1984, the Nevada Department of Employment, Training and Rehabilitation reported Friday.
The Strip resorts are hiring some 17,000 people, little consolation for the 111,700 unemployed Nevadans in today's economy.
Slowdown offers Nevada a chance to look inward, plan for long term
That big sigh you hear is Nevada catching its breath.
After an unprecedented 20-year-plus run, the state has recorded its slowest growth rate since 1967.
For decades, Nevada’s revenue has flowed from the tourism-dependent gaming industry and consumption-based taxes, such as sales, tying the state directly to the national economy. The state has no personal or corporate income tax.
Moreover, much of government fiscal health has been tied to continued growth. New growth was required to pay for the needs created by yesterday’s growth, including schools, roads and health care. This resembled a Ponzi scheme, in which there is a ceaseless need for new investors to pay off the old investors. Without growth, there are no new investors.
As UNLV economist Keith Schwer put it: “When the business cycle turns down, the public sector ends up in chaos.”
Nevada now faces a budget deficit of more than $1 billion over the next two budget years, and Gov. Jim Gibbons, vowing not to raise taxes or levy new ones, has indicated state government may have to cut as much as 34 percent of its budget. Lost in the debate is this sobering assessment from economists and analysts: Southern Nevada’s days of frenzied growth are likely gone, never to return.
Nevada historian Michael Green said Las Vegas should take the time to redefine itself. Indeed, some policymakers, such as Commissioner Chris Giunchigliani, said such an assessment is long overdue.
“We should have been planning to prevent the bust,” Giunchigliani said. “But we treated gaming as if it were infallible. We bought the line that growth pays for growth — and growth absolutely does not pay for growth. We should start that conversation about doing things differently.”
At the top of the list, she said, should be economic diversification
My 2 cents: Uhm, shouldn't this have been obvious to our economic "experts" years ago - when something could have been done about it? I was predicting it would be a major looming problem back in 2006 - in some of my very first writings: The Las Vegas gravy train has ended
Las Vegas economy may get a hangover from high living
Analysts say hotel-casinos won't recover quickly from a downturn this time. Tourists and locals alike say the Strip has become too high-end for them.
Gaming revenue on the Strip fell 25.8% in October compared with a year earlier. “People might want luxury, but are they willing to pay for it?” asks one economist.
Las Vegas has staked its future on 320-thread-count linens, 2,200-square-foot suites, filet mignon, Chanel, seaweed wraps and $5,000 bets on slot machines. The latest batch of mega-resorts revels in luxury. Thrift mostly vanished with showgirls and the Rat Pack.
Now some observers are wondering whether that was a wise bet.
Analysts say Las Vegas Boulevard, now pocked with empty lots and stalled construction projects, should bounce back once the credit crisis wanes and tourists feel confident enough to splurge on vacations. But although previous downturns passed as quickly as a thunderstorm, economists expect this squall to linger through 2009, push Clark County's unemployment rate as high as 10%, and wipe out casino projects.
Tourism is Nevada's primary breadwinner, and the Strip, with more than $6.8 billion in gaming revenue last year, is the biggest cash machine of all. How its high-end image plays to tourists during and after the recession will affect the entire state.
"People might want luxury, but are they willing to pay for it?" said Keith Schwer, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas. "We might have missed our brand."
"If casinos want people back, they need to offer value," said one letter to the Review-Journal. "If they balk at the idea of $3 beers, cheaper food and fewer shakedowns, then perhaps they can try paying their debtors with a mountain of their own folly."
Las Vegas feels the pinch as the party ends in America
The young woman behind the roulette wheel stifled a yawn as she tried to converse with the drunken, middle-aged man who was her lone customer.
The slot machines were quiet, and rock music boomed louder than necessary in the half-empty bar.
It could have been a scene from any casino on a dirt road in an unforgiving stretch of desert, but this was, in fact, the Hard Rock Hotel, one of the premier gambling and party destinations in America.
Welcome to Las Vegas at the turn of 2008 – possibly the most depressing and alarming year in the hard-living city's short history.
A town that was once considered recession-proof, as people continued gambling and drinking away their sorrows during the bad times, is proving to be anything but.
Until now, gaming revenues in Las Vegas have dropped significantly only once since 1970, and that was in the aftermath of 9/11.
In October this year they dropped a staggering 25.5 per cent. And across Nevada, revenues tumbled 22.3 per cent the same month, the largest single monthly drop in state history and the 10th straight month gaming revenues had fallen. Visitor numbers to Las Vegas dropped 10 per cent last month compared to the previous year – and those that are visiting are thought to be spending less than in previous years.
Norm Clarke, who as the city's leading gossip columnist has witnessed Vegas ride out previous tough times is downbeat about the current climate. "It's pretty grim right now," he said. "You drive up and down the strip and see all this construction, but you know that a lot of it has been put on hold."
A total of 54 Sin City construction projects have reportedly been cancelled or put on hold as funding has dried up, with one of the most noticeable being the suspension of work on the Echelon Resort, a $4 billion luxury complex that was supposed to replace the Stardust Hotel but the future of which is now in doubt.
Many who once viewed Sin City as an invincible boomtown, which would party on through any storm, are quickly revising those opinions.
Indeed one of the saddest aspects of the current downturn can be seen in the Vegas strip clubs and lap-dancing bars, which according to reports have seen a sharp rise in the number of girls trying to make a living by exposing their bodies.
Shai Cohen, the marketing manager at the "world's largest" gentleman's club, Sapphire, said he has seen a remarkable increase in the number of girls working as lapdancers in Vegas. "We used to get between 250 and 300 girls turning up here to work on weekends," said Mr Cohen. "Now we are getting between 350 and 400. This started happening in the last six months or so."
Economy Blamed For Rising Violence
According to an official with the Metro Police Department, domestic violence-related homicides in 2008 have surpassed last year's total. There have been 43 domestic violence-related homicides so far this year compared to 27 in 2007.
According to the Las Vegas "Review Journal," Julia Proctor, the executive director of the Henderson SAFE House, is seeing evidence of a link between difficult economic times and a rise in domestic violence. SAFE House conducts a court-ordered program that teaches people convicted of domestic violence how to deal with stress and anger. For the first time since 2003 that program has a four-week waiting list.
Moving on to the brighter side of things - home prices are becoming more affordable
Las Vegas home prices drop to August 2003 levels
The price of existing homes sold in Las Vegas in November plummeted to their lowest level since August 2003 and the new-home and condominium market continued its dismal performance, according to statistics released by SalesTraq.
The median price of the 2,737 existing homes sold in November was $170,500, a decline of $9,500 from October. The November prices are 33 percent below the same month a year ago.
The reason for the decline was the continued impact of foreclosure homes. Some 62 percent of the existing home closings were bank-owned with a median closing price of $160,000. The other 38 percent of closings had a median price of $198,000.
Foreclosures and need for cash force dramatic price cuts - Builders below $100 a square foot
The competition from foreclosures continues to force Las Vegas homebuilders to cut prices and build smaller, more affordable homes and in some cases not build any.
“This is the worst financial situation we have been in since the Depression, and what builders have begun to do is recognize the world is changing around them, and price is a reflection of that knowledge,” said Steve Bottfeld, executive vice president of Marketing Solutions. “This is a big reality check. This is the beginning of a major change in the kind of product developed in the Las Vegas market.”
Eighteen builders have more than 100 models priced under $100 per square foot, said Larry Murphy, president of SalesTraq, which tracks the Las Vegas housing market. The price per square foot of new homes sold through October was $126.01 — a 30 percent decline from $180.17 in 2007. That’s the lowest since $109.33 per square foot in 2003.
SalesTraq released a list that shows KB Home, for example, offering a model in the Providence master-planned community in northwest Las Vegas for $75 a square foot.
In October the median price of a new home sold was $245,781, a 31 percent decline from the market’s high of $355,435 in April 2007, according to Sales-Traq.
Homebuilders are responding to market conditions, Bottfeld said. Homes are getting smaller, going from about 2,100 square feet to 1,600 to 1,800 square feet and within reach of the median income.
Bottfeld estimates homes costing $100 a square foot or less will constitute 20 percent to 25 percent of the market within a year, compared with about 7.5 percent now as estimated by SalesTraq.
The reason builders are willing to go so low is to make money to pay suppliers and employees and pay down debt, Bottfeld said.
Pardee Homes Division President Klif Andrews said builders aren’t making money selling at such low prices, but acknowledged it’s about cash flow to return to the parent company.
“You may have developments where they invested dollars in finished lots and have standing inventory they are trying to sell down,” Andrews said. “We have already spent a fair amount of money, and we are trying to recoup cash. At this time, cash is so critical.”
Breaking even and maintaining current operations is the goal of builders today, Andrews said. Pardee has 90 employees in Las Vegas today compared with nearly 300 two years ago.
Don DelGiorno, division president of KB Home, said the builder’s price reductions are driven by supply and demand. Buyers aren’t being drawn by incentives and granite countertops, and KB’s average prices are $90 to $95 per square foot.
“You can’t fool the consumer,” DelGiorno said. “Especially with the way prices have dropped and uncertainty with employment.”
Tom McCormick, president of Astoria Homes, said that if builders want to sell homes, they have had little choice but to lower prices to match the competition.
Astoria has no homes priced under $100 a square foot at this time, but McCormick said the builder is getting close. Competition from foreclosures is driving the market.
“We are going to have to lower as the market makes us go,” McCormick said.
Murphy said the average price of foreclosure sales in October was $99 per square foot, making many new homes more than competitive.
“We are matching the prices of the resale segment driven by foreclosures,” Andrews said. “It will probably surprise most home shoppers that new homes are competitive with foreclosures. They have a warranty, and they aren’t in a neighborhood with other foreclosures, but we struggle to get that message out.”
Andrews said he doesn’t know how much lower prices can go. That will vary by product and location, but he added he’s not seeing as many price reductions today as he was six months ago.
“It seems a lot more stable now,” Andrews said. “The biggest price correction seems to have already happened.”
DelGiorno said he thinks prices are close to the bottom, but he said he thought the same thing six months ago, and prices have come down.
My thoughts on when we'll see the bottom: Las Vegas homes for $60 a Square Foot?