Las Vegas's Economy Is on the Brink of a Boom

(Bloomberg View) -- What U.S. city will boom in 2018? If you're placing bets, you'd look for a place still suffering a hangover from the housing bust, with subdued economic activity and a lack of excess for a decade. You'd want to find an economy where demand is starting to exceed supply in a significant way, with price signals and economic activity responding. And with the U.S. economy as a whole starting to feel a bit frothy, you'd try to identify a place that benefits from American exuberance. In other words, you'd look for Las Vegas.

Perhaps no place in America was hit harder by the financial crisis than Las Vegas. Unemployment peaked in late 2010 at 14 percent. Home prices, as measured by the S&P/Case-Shiller Home Price Index, fell by an astonishing 62 percent from their 2006 peak. Single-family building permits fell by over 90 percent. Even today, home prices remain 30 percent below their peak, and single-family building permits are still barely half of what they were 20 years ago.

But after a decade of pain and recovery, no place is better poised to boom than Las Vegas in 2018. The Greater Las Vegas Association of Realtors announced that at the end of November, the number of unsold housing units for sale had fallen 30 percent over the past year, representing less than two months of supply. Prices have responded, with Las Vegas joining Seattle as the only two metros with home prices growing by double digits over the past year.

But perhaps most important, after years of declines in housing inventory and increases in prices with relatively little growth in construction, we're starting to see construction respond as well. Single-family building permit activity is now at a 10-year high, with a significant increase over the past couple months. With inventory at record lows and good demographics, there's no reason this shouldn't continue in 2018.

In metros like Las Vegas that are so dependent on housing market activity, this is good news for job and wage growth as well. Like most places, Las Vegas is facing a shortage of construction workers. And here, we're seeing wage growth respond. Average hourly earnings for Las Vegas construction workers are up by 8.2 percent over the past year. And the only way Las Vegas will be able to increase its construction activity in 2018 will be by keeping wage growth strong and finding more workers from somewhere, whether it's training local workers or attracting construction workers from somewhere else.

Of course, housing isn't the only cyclical industry that drives the Las Vegas economy: Tourism plays a big role as well. And as Calculated Risk notes, Las Vegas was on pace for record convention attendance in 2017, which should grow further in a strong 2018 economic environment. This might be why after a quiet decade, big casinos are starting to rumble and make land acquisitions for future development. Between 1996 and 2010, there were 12 new casinos built on the Las Vegas strip. Since then, there have been none. A return to even a modest casino development cycle would only add fuel to Las Vegas's economic expansion.

Skeptics may worry that Las Vegas falling in love with housing and casinos again is a sign that we're repeating our mistakes. But Las Vegas has always been, and perhaps always be, an economy that booms and busts. If home price and construction growth goes on for too many years, especially if it becomes backed by sketchy loans and too much leverage, then we'll have reason for worry. But for now, with home prices and construction activity still well below peak levels, the Las Vegas economy may be every casino gambler's dream -- the prospect of riches without the immediate risk of being wiped out.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg View columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

To contact the author of this story: Conor Sen at csen9@bloomberg.net.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net.

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