2008 CRASH STILL FELT
Lehman collapse reshaped Colorado economy, for better and worse
One decade later, the country’s worst financial crisis since the Great Depression continues to shape the Colorado economy. Home prices have soared, but a larger share of the population now rents. Millennials have delayed marriage and buying homes.
T he collapse of Lehman Brothers a decade ago ushered in the country’s worst financial crisis since the Great Depression, one that continues to shape the Colorado economy even as the lessons it offered fade.
“There are many excellent econometric forecast models, but none of them can account for the role of irrational human behavior, greed, and the quest for power,” said Broomfield economist Gary Horvath.
To a large degree, the wounds the country suffered were selfinflicted. Forecasters, Horvath included, were hard pressed to understand what was unfolding before and even after Lehman and a host of other financial firms failed, he said.
Home prices and rents are much higher in metro Denver than they were before the crisis after housing swung
from a surplus to a shortage. Wage gains have not kept pace, leaving more households stretched financially.
Investors snapped up distressed properties in droves, turning them into rentals. Developers focused more attention on apartments, mostly for wellheeled tenants. Millennials delayed marriage, having children and buying homes. Mortgages became harder to get, and a larger share of the population now rents than before the crisis.
Thousands left the labor force as the state’s unemployment rate soared from a low 3.8 percent a year before Lehman’s bankruptcy to 8.9 percent two years after. The number of construction workers in Colorado dropped 42 percent from peak to bottom, and the number of mortgage brokers was halved, forcing many into new, and often lowerpaying, careers.
A big drop in stock values decimated savings and forced many baby boomers to work longer than planned. Several independent banks in the state failed or were acquired, and the biggest players became more dominant.
The state lost 104,500 jobs in 2009 and 23,400 in 2010. For 23 consecutive months the Colorado economy lost jobs on a monthovermonth basis, Horvath said. And for two years, the Colorado economy shrank.
Between 2004 and 2014, more than 300,000 homes in the state went into foreclosure, with about 60 percent of those filings coming after Lehman collapsed, according to the Colorado Department of Local Affairs.
Metro Denver, scared and scarred, found a way to crawl out of the rubble earlier than other metros and dust itself off. And yet the region couldn’t escape the consequences that followed, even as it desperately tried to move forward.
Early recovery
Colorado’s Front Range was a big participant in the technology and telecom boom of the late 1990s and early 2000s. That also meant the region paid a big price when the dotcom bubble burst in 2000 and 2001.
But in some ways, that proved to be a blessing in disguise. The long recovery from that downturn kept the Front Range economy sober as other parts of the country got drunk on the financiallyengineered housing boom that led to Lehman’s demise.
“The 2001 downturn was much more serious here than the Great Recession,” said Stephan Weiler, an economics professor at Colorado State University.
Borrowers in Colorado did take on subprime loans and toxic mortgage products, but more often to stay float rather than to buy two or three properties to flip for a quick profit. Home prices didn’t get as frothy, and when they fell, they didn’t fall as hard.
Between the third quarter of 2002 and the third quarter of 2007, average home prices in Nevada, Florida and Arizona soared more than 70 percent, according to an index from the Federal Housing Finance Agency. Colorado saw a much more modest increase of 16.2 percent.
Metro Denver, however, has stood out during the recovery for its rapid spike in home prices, which creates an entirely different set of worries. Since Lehman’s collapse, Colorado’s home price index is up nearly 77 percent, compared with gains of around 40 percent each in Nevada and Florida and 30 percent in Arizona.
Zillow, which has its own index, estimates that median home values nationwide are up 8.7 percent from the housing bubble’s peak. Metro Denver by contrast, is 65.6 percent above its prior peak, with a median home value of $397,800.
Weiler notes that metro Denver worked hard on making itself an attractive destination and to diversify its economy. Job growth kicked in sooner than in other places as young adults flocked here to take advantage of those opportunities.
“Workers used to go where there was employment,” said Glenn Mueller, professor at the Burns School of Real Estate and Construction Management at the University of Denver. But in the years after the crash, he started noticing a different attitude among his students.
They would move to where they wanted to live, then worry later about gainful employment. What also changed was that employers were willing to follow them. Aside from the usual favorites such as New York and San Francisco, Denver joined Seattle, Portland, Ore., and Austin, Texas, on a shortlist of “it” cities.
Other changes also gave Colorado a boost. In 2013, Colorado became the first state to legalize recreational marijuana, which set off a frenzy to claim available warehouse and retail space. In Weld County, a boom in horizontal drilling this decade created thousands of jobs and revived a tired oil and gas field. Greeley has ranked as one of the top performing metro economies in the nation since Lehman failed.
But the core story was and remains about migration. Although migration nationally is down, in part because the downturn locked many people into homes and mortgages they couldn’t escape, the Front Range proved a magnet.
“The fundamentals that are driving the Denver, Fort Collins, Boulder and now Colorado Springs economy are the millennials,” said Tom Binnings, a senior partner with Summit Eco nomics in Colorado Springs.
But that popularity created another set of problems. The region was illequipped to handle the crush of newcomers, which first pushed up rents and later home prices at some of the sharpest rates in the country, and clogged roads in a state that has struggled to finance transportation spending.
What once was a comparatively affordable area before the crisis has come the most expensive housing market outside the country’s coastal areas.
Housing shortage
The crash of 2008 was devastating for the construction and mortgage industries, just as the dotcom crash crushed the technology and telecom sectors. Initially, it didn’t seem to matter, given the oversupply of housing and the need to get foreclosed homes occupied.
In Denver, that shortage benefited those who already owned real estate, but complicated life for those looking to buy or rent.
“Fundamentally, when Lehman collapsed and the downturn began in 2008, the U.S. was forced to hit a reset button,” said Ryan Boykin, a cofounder of the Atlas Real Estate Group in Denver.
Boykin started his real estate investment firm in June 2008, just a few months before Lehman went down. Bear Stearns had failed that March and the housing market was already turning to mush. People thought he had lost his mind.
“I had a lot of wise people tell me I was crazy for doing this,” Boykin recalled. “It was impossible to get credit or bank loans.”
Investors, stung by the sharp drop in stock values, began hoarding their capital and looking for lower risk alternatives. Residential real estate, which was selling below replacement cost in many places, seemed to offer an opportunity.
Mortgage credit went from being abundant and easy to obtain to scarce and hard to secure. People who stretched too far to obtain overpriced homes lost them, depressing property values. Some who avoided risky mortgage products, but lost their jobs, saw their assets depleted and eventually tossed in the towel. More people were forced to rent.
But Boykin also said he was confident of Denver’s longterm prospects. The market was down, but he didn’t expect it to stay down.
Normally, the answer to a shortage of housing is to build more homes, across all price points. But the housing crash damaged the ability to do so. For five years, there was little new home construction in Colorado, Boykin notes.
The crash also created a survivor bias, in that those who survived were those who those who took the most conservative approach. With labor and land limited, builders focused on the products that promised the highest return — luxury apartments and highend homes — not necessarily the ones where there was the most demand.
In the 10 years before Lehman’s bankruptcy, builders in Colorado pulled a monthly average of 2,561 singlefamily home permits. In the 10 years that followed, the average has dropped to 1,188 a month, much of that coming in just the past five years.
Financing was also a big barrier. The independent banks that lent the most heavily for construction were among the hardest hit. On June 30, 2008, Colorado had 156 banks, with four in 10 of its banks holding $100 million or less in assets, according to the Federal Deposit Insurance Corp.
The FDIC counted only 81 Colorado banks in its June 30 report, and only two of every 10 of those had less than $100 million. Nationally, the FDIC shut down 465 banks between 2008 and 2012, compared with only 10 banks in the prior five years.
Nine Colorado banks failed between 2009 and 2011, including New Frontier Bank in Greeley, United Western Bank in Denver and Colorado Capital Bank in Castle Rock, according to FDIC counts.
Dismayed by what happened after Lehman failed, the federal government bailed out some of the nation’s largest financial institutions, deeming them too big to fail. The corollary was that some banks, including several in Colorado, were deemed too small to survive.
Rural divide
Another thing the Great Recession did was deepen the divide be tween the northern Front Range and the rest of Colorado. Since 2008, most of the new jobs created and many of the new people moving to Colorado have settled in a narrow band stretching from Colorado Springs to Fort Collins and over to Greeley.
What isn’t as well understood is that between 2001 and 2011, the Front Range lagged behind both the rest of Colorado and the U.S. when it came to employment growth, Weiler notes. In the years since, the Front Range has left both in the dust. The rest of Colorado isn’t just struggling to keep up with the Front Range, it trails the rest of the country.
Answers on how to fix that aren’t easy to come by. The lack of growth and opportunity in many parts of the country has fueled resentment and contributed to the rise of populism, including Donald Trump’s election as president, Binnings said.
Colorado counties such as Las Animas and Huerfano, considered solidly Democratic, voted for Trump the last election, he said.
The severity of the crisis and the recession left lenders and borrowers alike cautious and skeptical, said Dave Mooney, CEO of Alliant Credit Union in Chicago. That caution held things back, and on the whole Americans have become less entrepreneurial and willing to take risks than in the past.
But some of the practices that got the country into trouble are starting to come back, such as zero down payment loans and even subprime mortgages, now packaged as “nonprime.”
“My concern is that prolonged periods of good times breed overconfidence and a forgetting of prior lessons and letting down the guard. It is hard to know where the next threat will come from,” Mooney said.
Could it be subprime car loans? Borrowers during the housing crash let their mortgages go and stayed current on car payments. Lenders responded by amping up the loans they made to car buyers with poor credit scores. But Mooney doesn’t see a big problem there.
Americans also now hold a record $1.5 trillion in student loan debt, with little to show for it in terms of higher average wages on the whole. But much of that debt can’t be discharged in bankruptcy or shed like a mortgage in foreclosure. It will be a millstone around borrowers’ necks for years to come.
Others think financial troubles overseas or brewing trade disputes could derail the U.S. economy, while some argue a day of reckoning will come for the rising federal debt or the Federal Reserve’s bloated balance sheet.
Binnings predicts escalating health care costs as boomers age could trigger the next crisis. And closer to home, the Front Range could see its attractiveness slip as young adults and current residents relocate to places where living costs and wages are in better balance.
Mooney doesn’t try to guess, but he knows with interest rates so low for so long, the bad seeds have already been planted. And if there is a lesson from the collapse of Lehman, people need to pay attention to the weeds that are popping up, before they take over.