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Gaming Guru

Hubble Smith

Cost of Living: Growth and Consequences

19 April 2004

The cost of living in Las Vegas usually goes up every time you step into a casino, but historically, it's been relatively low compared with other U.S. cities.

Part of the lure bringing 7,000 new residents to Las Vegas every month is a perception that it's cheaper to live here, especially when they're coming from California and the East Coast.

That's changing as skyrocketing home, energy and health care costs are making Southern Nevada a more expensive place to settle down and raise a family.

"The cost of living is clearly rising as evidenced by the rising cost of housing, even labor costs," said Sung Won Sohn, chief economic officer for Wells Fargo bank in Minneapolis.

"Still, Las Vegas is very attractive relative to surrounding states such as California and Arizona. Look at Phoenix. The cost of living there has been going up at a faster rate."

A cost of living index compiled by the American Chamber of Commerce Researchers Association ranked Las Vegas slightly higher than the national average last year.

Las Vegas registered 103 on the index, with the national average set at 100. The cost of living index does not include taxes.

Erol Yildirim, project manager for Arlington, Va.-based ACCRA, said Las Vegas compares favorably to California metropolitan areas, about even with Denver and Albuquerque, N.M., and a little on the high side of Phoenix and Salt Lake City.

In Las Vegas, rising costs in all categories of the index -- housing, utilities, transportation, groceries, health care and miscellaneous goods and services -- are gobbling up larger portions of the average household's disposable income.

The Consumer Price Index for Las Vegas has climbed from 152.56 in fourth quarter 1994 to 194.21 at the end of last year, an increase of 27.3 percent, according to the Bureau of Labor Statistics. That compares with a national increase from 149.77 to 184.80 in the same 10-year period, or 23.4 percent.

Kelly Matthews, an economist who compiled a local cost of living index for First Security Bank before it was acquired by Wells Fargo, said the Las Vegas metropolitan statistical area experienced marginal increases throughout most of the 1990s.

"There was a ton of homes being built, but the prices and appreciation weren't as strong because so much was being built," he said.

"My impression of Las Vegas: There was just no place in the country that showed the kind of growth you had in terms of housing."

Matthews noted the cost of living index is not the same as the consumer price index. The CPI frequently is called a cost of living index, but it differs in important ways of measuring costs.

The Bureau of Labor Statistics has used a cost of living framework for many years in making practical decisions about questions that arise in constructing the CPI.

On its Web site, the bureau explains that a cost of living index is a "conceptual measurement" goal and is not an alternative to the CPI.

A cost of living index measures changes over time in the amount that consumers need to spend to reach a certain "utility level" or "standard of living."

Both the CPI and cost of living index reflect changes in the prices of goods and services that are directly purchased in the marketplace.

A complete cost of living index goes beyond this to take into account changes in other governmental or environmental factors that affect consumers' well-being such as safety and education, health, water and air quality and crime.

Generally speaking, the cost of food and clothing in Las Vegas has gone up on par with the national inflation rate, said Jeremy Aguero, principal of Applied Analysis, a Las Vegas economic research firm.

It's the housing side of the equation that's out of whack, he said.

"I look at the number one thing: housing," Aguero said. "Housing's going to be huge. Housing is the key; it's the linchpin in inflation. It made us the lowest cost alternative prior to 2000 and now it's making us have a higher cost of living.

"Inflation overall has been pretty much in check. The other side of the coin is to look at the rise in income. Income's only up 2 percent a year, housing's 14 percent. It's not keeping pace."

The median price of a new home in Las Vegas jumped 73 percent in the last 10 years, from $121,500 in 1994 to $209,600 in 2003, said Dennis Smith, president of Home Builders Research. It's up about 50 percent from $139,500 five years ago.

Existing home prices, which appreciated at less than 2 percent in the mid-1990s, were lifted by new home sales, going from a median of $111,250 in 1994 to $180,000 in 2003.

"There's no way to stop price increases unless a couple of things happen," Smith said. "One is we get the investors out of the market. Second, interest rates go up. That'll keep mom and pop and their son and everybody else from buying rental houses."

"The other thing is we have speculation going on," said Keith Schwer, director of the Center for Business and Economic Research at University of Nevada, Las Vegas. "Part of that rise (in home prices) is due to speculation. If the stock market hasn't been a good gamble, why not gamble on real estate? It's happened before."

Frank Nielsen, president of Montecito Cos., a Las Vegas real estate developer, said low interest rates have offset rising land prices in Las Vegas and stimulated demand for housing, which drives up prices.

"Even though land prices have gone up, the monthly mortgage has gone down and people are able to afford more home," he said. "I think Las Vegas has been a bargain for so long and still is. Las Vegas used to be a super bargain. Now it's just a bargain."

Sohn said U.S. inflation was 1.9 percent in fourth quarter 2003 and projected a drop to 1.2 percent in 2004.

"However, housing is very important," he said. "About 40 percent of the Consumer Price Index comes from housing-related items: mortgage, insurance, gas, electricity, maintenance, upkeep and all that. You can see what impact that has on the CPI."

The price of food is going up in Las Vegas, Sohn said. Raw materials account for a tiny fraction of food cost. Most of it is labor and energy costs associated with packaging and distribution, he said.

"Food is not really that much," said Angela Ramos, who estimated her monthly grocery budget at $700 while shopping for Hispanic food at King Ranch Market in Las Vegas. "But with three kids at home, you have to feed them. You have to fill the refrigerator."

Ramos said she spends about $100 a week at other grocery stores such as Costco and Albertson's, but goes to King Ranch for specialty items such as "bananas machos."

Schwer said some things are cheaper in Las Vegas and some are more expensive, such as automobile insurance, which he suspects could be from alcohol being served around the clock and out-of-town drivers on unfamiliar roads.

"Food is more expensive here than California, even with the unions," he said. "There's less competition here. Also, there's been rapid increases from Nevada Power. California and Nevada saw power rates go up significantly.

"What are the implications of Las Vegas not being a good buy for economic growth? Businesses are not as profitable. You've got gas prices going up, energy prices going up, housing going up, insurance and food. So pretty soon it's not nearly as attractive."

A stable economic engine will create 2.5 percent job growth, or 21,000 new jobs, in 2004, down from 2.8 percent growth last year, according to a February report from Marcus & Millichap on commercial investment in Las Vegas.

The unemployment rate will remain flat at 5.4 percent.

Residents will possess more disposable income in 2004 as a result, with the average household income expected to rise by 2.4 percent to $77,337 a year, the report said.

Sohn said Las Vegans will see more pay raises at the lower end of the wage scale than at the higher end, partly because of demographics.

"There aren't that many younger people joining the labor force, in Las Vegas and elsewhere, in part because they can't find a job," he said. "I guess I should say, suitable jobs. The other thing, (more) older people are now retiring. They need jobs to maintain their lifestyle, so there's fewer jobs for younger people."

Catherine Levy, spokeswoman for the Las Vegas Chamber of Commerce, said she found the cost of living to be much lower here than places she lived on the East Coast, including Boston and Providence, R.I.

"Obviously, the housing situation has gotten tougher," she said. "It's still cheaper than Seattle or San Francisco. When you look at the overall numbers, we still are pretty reasonable in our cost of living. People are still making that leap of faith (moving to Las Vegas) and they're happy when they get here."

Marie Smith moved to Las Vegas about eight years ago from Riverside, Calif., and found the cost of living to be about the same, though she's making a little more money and living rent-free as a property manager.

"Gas prices are astronomical in both states," she said. "Groceries, I haven't noticed a big difference. Cigarette prices are definitely less."

Aguero said money freed up by lower interest rates and tax breaks may mask any increases in the cost of living for Las Vegans.

"We don't feel rising costs as much as we would," he said. "What we're worried about here is a reversal of fortune. Lower interest rates mean you have more disposable income. What happens when five-year and three-year ARMs (adjustable rate mortgages) catch up? Over time, higher housing costs mean a higher percentage of income goes toward housing.

"There's potential for the opposite effect, to depress consumer spending. That trend is two or three years out."

It's also becoming a major expense to drive around the valley these days. The average price for regular, unleaded gasoline was $2.06 a gallon in March, a record high, according to AAA Nevada.

Nevada ranks as the third-most expensive state in the country to buy gasoline, after California and Hawaii, 34 cents above the national average.

"AAA is very concerned about the impact this situation may have on people who are already struggling to pay their bills," spokesman Sean Comey said. "Significantly reducing the amount of fuel we use is not a realistic option for most people. We need to use our cars to get to work, take our kids to school and to go shopping."

Another energy cost that experienced sharp spikes in recent years is electricity. Nevada Power has steadily increased rates since the brownouts that occurred throughout California and the West.

Customers paid average electric bills of $112 a month in 2003, based on 1,200 kilowatt usage, up from about $78 in 1994, according to data from Edison Electric Institute.

Southwest Gas has a 16.7 percent rate increase pending before the Public Utilities Commission to compensate for the higher cost of natural gas.

The average monthly residential water bill in 2003 was $30.25 based on usage of 15,900 gallons, compared with $21.42 for the same usage in 1994, according to the Las Vegas Valley Water District.

"Utilities are outrageous," said Norma Heller, a 45-year Las Vegas resident who watched her electric bill go from $200 a month to $300 and more over the last six to 10 years.

Health care is another category of the cost of living index that's taking a bigger chunk out of people's wallets.

In a 59-item breakdown of consumer prices in Las Vegas, ACCRA reported medical expenses of $78.33 for doctors, $113.75 for dentists and $1,139.60 for a hospital room.

That compares with national median prices of $67.63, $81 and $573.90, respectively, based on 307 cities surveyed.

David Dahan, chief executive officer of Orgill Singer insurance firm, said Las Vegas has always had a tendency to be a little higher in health care costs than the rest of the nation, partly because of its remoteness.

"What contributes sometimes is the uninsured, indigents accessing the facilities, that's a factor," he said. "I also think we have a transitional population, a lot of tourists, and that may allow them (care providers) to charge a little more."

Dahan said the cost of a hospital stay will become more competitive with the opening of three new hospitals in the valley.

The nation on the whole is grappling with spiraling health care costs that left 41 million U.S. workers without health insurance in 2001, according to the U.S. Census Bureau.

The Kaiser Family Foundation reported a 50 percent increase in the average worker's cost for family health insurance, from $1,619 to $2,412 a year.