LAS VEGAS—During the long property boom here, when subdivisions marched like an advancing army into the desert and new casinos opened with the predictability of an annually blooming flower, the joke was that construction workers were building houses for other construction workers. No one’s laughing anymore.
In the fat years, Las Vegas and other boomtown cities across the Sun Belt appeared to have discovered a perpetual motion machine. The principal agent of growth was growth itself—more houses, condominiums, shopping malls, and warehouses, plus all the jobs that they generated, from carpentry and plumbing to real estate sales and accounting. With the collapse of the property market, however, that machine has now stalled here and in dozens of other high-flying communities—from Cape Coral, Fla., and Myrtle Beach, S.C., to Phoenix and Riverside, Calif.—that excessively relied on residential and commercial development for their prosperity. Places that once measured good times by the number of bulldozers digging foundations are now scrambling to fill the hole left by the construction industry’s collapse—and reluctantly acknowledging that real estate may never again fuel as much growth as it once did.
“This is no normal recession,” said urban-planning expert Robert Lang, codirector of the Brookings Mountain West Center at the University of Nevada (Las Vegas). “This is an inflection point, beyond which the road is uncharted. What worked in the past may not work again.”
The housing industry is facing a difficult long-term adjustment. During the boom, rampant speculation and the collapse of mortgage standards drove the industry’s growth to unsustainable heights. From now on, its course again will depend more on the fundamentals of demand, particularly demographic and income trends. As the industry downshifts to this slower—but potentially more sustainable—pace, the national economy will struggle to replace the jobs that the housing frenzy generated.
The former boomtowns are confronting most immediately—and most acutely—the challenge of replacing development as an engine of growth. This rebalancing is overdue. In the frothiest real-estate markets, homebuilding reached levels that the underlying trends in population and economic growth could not support. Experts say that the boomtowns can build more-stable economies if they diversify their employment base and allow housing to once again become the result—more than the driver—of growth.
Yet building a new economic foundation in these communities won’t be easy or quick. That’s especially true because the places where homebuilding soared the highest have fallen the furthest since the market started unraveling in the middle of the past decade. The raw numbers are staggering: In 2005, Cape Coral issued nearly 30,000 residential building permits, compared with an average of about 5,600 per year in the 1990s. Phoenix and Orlando, Fla., annually issued about twice as many new-home construction permits in 2005 than in the 1990s; in Riverside, the number tripled.
Nationally, since the real-estate market reached its high point in 2005, home construction has cratered essentially everywhere. In 2005, housing starts peaked at 2.1 million; for the past two years, housing starts have stalled at less than 600,000, about half the rate of 1960, when the U.S. population was three-fifths as large. The fall has been most pronounced in the boomtowns.
David Crowe, chief economist at the National Association of Home Builders, measures a community’s economic reliance on homebuilding mainly by tracking the number of new construction permits issued per capita. Almost all of the communities that have suffered the greatest per capita declines in new building since 2005 are those that topped that year’s list for permits. In all of these former high-fliers, new construction activity has plummeted not only below 2005 levels but even its average during the more-sedate 1990s. (Cape Coral, for instance, issued only one-sixth as many permits in 2009 as it did annually in the 1990s.) The effects on the local job markets have been catastrophic: Since 2006, according to federal figures, the number of construction jobs has dropped by at least 40 percent (in order of losses) in Cape Coral; Las Vegas; Riverside; Bradenton, Fla.; Phoenix; Sacramento, Calif.; Orlando; and Tampa, Fla.
These trends aren’t likely to rebound anytime soon: The housing markets almost certainly will recover even more slowly in the former high-fliers than elsewhere. That’s partly because their overbuilding left them with larger inventories of vacant properties that must be sold before building can resume in force. (In Phoenix, local economic consultant Elliott Pollack said, “If you didn’t build a new home for three years, it would be OK, because there is so much excess.”) It’s also because the speculators and investors who drove so much of the boomtowns’ building before the crash are unlikely to plunge back into these markets for years, if ever. Homebuilders’ economist Crowe isn’t alone in his belief that the boomtowns’ building activity will never again match its peak. “Those levels were just over and above the underlying demographic demand,” he said.
The combined effect of all these factors may be most visible in Las Vegas, where a binge in casino construction paralleled—and reinforced—the homebuilding frenzy. So much was being built that Steve Holloway, the executive vice president of Las Vegas’s Associated General Contractors, once publicly mused—only partly in jest—that the construction industry needed nothing so much as another few thousand illegal immigrants. “It seemed like there was no end to the projects, there was no end of companies coming from out of state to get established here,” he recently recalled. Randall Schaeffer, who has run a local homebuilding company since 1981, says that as the market approached its 2005-06 pinnacle, the expectation of unending growth was so powerful that “there were people speculating on land on the other side of the Hoover Dam [35 miles away]. People thought it would go on forever.”
Instead, the real-estate market has experienced a collapse so deep and broad that people here liken it to a natural disaster. No new casinos have opened since last year, and Holloway said he doubts that any more will be built for at least five years. In southern Nevada, 25 percent of office space and 15 percent of industrial space is vacant, according to Jake Joyce, a local economic consultant. The residential housing market resembles the bachelor-party buddies in the morning-after scene in the film The Hangover: dazed and staggered.
Schaeffer, for one, is still in business only because he didn’t speculate as aggressively as many of his competitors did during the boom. But he, too, suffered large losses in the crash and has been forced to radically retrench. An affable and unassuming 59-year-old, Schaeffer built 180 to 240 homes annually during the good years. Now, he mostly builds homes on finished lots that a builder abandoned in a subdivision on the edge of town. The builder left behind 170 lots; Schaeffer has put up homes on 17 and hopes to match that number this year. That’s a pace that would long leave dust swirling on most of the lots. The homes are stylish and well designed, but Schaeffer is selling them for less than half of the original builder’s price. Even so, on a typical day, only a single potential buyer troops through the model homes. In his heyday, Schaeffer employed 18 full-time workers and hundreds of subcontractors. Today, he has just two full-time employees and only a handful of subcontractors. “I probably won’t be alive when it gets back to the kind of market we had,” he said, walking through the subdivision’s eerily silent streets one morning this winter.
Grudgingly, community leaders in boomtowns such as Las Vegas appear to acknowledge that Schaeffer’s grim vision is almost certainly correct. In nearly all of the fallen high-fliers, the new buzzword is “diversification.” “I think the leadership of these cities recognizes that the growth machine is broken,” UNLV’s Lang said. Finding a replacement, however, won’t be easy. Many local officials hope to replace hard hats with information-technology or clean-energy jobs—in effect, trading stucco for silicon. But a number of Sun Belt boomtowns, to hold down taxes, have cut corners on public services—notably, education—and are struggling to show that they can provide the skilled workforce and quality of life that such employers prize.
The Associated General Contractors in Las Vegas has moved further than most civic leaders to confront the implications of the housing breakdown. The trade association of construction companies recently proposed an impressively comprehensive plan to diversify and revive Nevada’s economy by modernizing its infrastructure, building transmission lines that could accelerate development of solar and wind power, and upgrading the skills of the state’s workers while promoting more academic partnerships with business. Though the group generally leans Republican, it favors several new taxes and fees to fund these measures—despite the strong opposition of new Republican Gov. Brian Sandoval.
“We’ve got to rethink the way we’ve done things,” Holloway said. “We’ve been talking about diversifying this state for 30 years, but we don’t have the infrastructure and educational system to do it.” This sort of rethinking won’t be easy in Las Vegas or in any of the other humbled boomtowns. But without it, none of them are likely to find a new foundation for prosperity.
The author is the editorial director of National Journal. NJ researcher Scott Bland contributed to this report.
This article appears in the March 17, 2011, edition of National Journal Magazine.