What Happens in Vegas, Stays in Vegas

At least that's what the rest of the U.S. is hoping.

A New York Times article on the state of the Nevada economy reports that the unemployment rate in Las Vegas is now 14.7 percent, compared with a national average of 9.6%. (Click here for article). In addition, Nevada has led the nation for 44 consecutive months in housing foreclosures.

Nevada has two problems, the first is the downturn in gambling activity in Las Vegas. Gambling is a form of entertainment and, as such, we should expect that demand is very sensitive to changes in income. A 2008 article entitled:

The Income Elasticity of Gross Casino Revenues: Short-Run and Long-Run Estimates by Mark W. Nichols & Mehmet Serkan Tosun

published in the National Tax Journal (Vol. LXI, No.4, Part 1) suggests that the short run income elasticity is about 1.85. What that means is that a 10% drop in income causes a 18.5% drop in gambling expenditures. The two year recession in the U.S. has been particularly deep and widespread and the effect on Vegas has been more severe than the rest of the country. Las Vegas gets a lot of its clientele from nearby California, but California's unemployment rate is 12.4%. Airlines have cut back flights to Las Vegas in an attempt to keep their revenues up, so even though the planes are full, there are fewer of them.

With fewer people gambling in Las Vegas, the casinos and hotels have been laying off staff. This contributes to the unemployment rate. Nevada residents are generally not a large source of income for the casinos, but an increase in the unemployment rate causes a decrease in the demand for housing. This is the second problem. Housing is a derived demand, derived from the number of residents and their incomes. When the economy was expanding, from 2002-2007, construction in Las Vegas was booming. The credit crisis, the reduction in gambling revenue and subsequent layoffs dramatically reduced the demand for housing and therefore the price of housing. As more and more homeowners found themselves under water, the foreclosure rate increased. Median home prices in Las Vegas peaked at $344,900 in April 2006 and currently sit at $129,950.

Las Vegas will recover. People will return. The question is not 'if', but 'when'. In the meantime, if you have never been to Vegas, now is the time. Room rates are cheap, the food is good and there are plenty of shows to see if you don't like to gamble.

Sources:
Employment Development Department, State of California
United States Department of Labor, Bureau of Labor Statistics
Housingtracker.net