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.