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America in Debt: How Colorado Springs Fares
By RICH LADEN - THE GAZETTE The nation might be awash in debt, but the Pikes Peak region is high and dry. That could change in a hurry, however. Housing prices haven’t skyrocketed in the Colorado Springs area at
the same rate as in some East and West coast markets, and the Springs’ credit score — an indication of the creditworthiness of local consumers — is better than several cities’.
But if debt and housing bubbles burst elsewhere, Colorado Springs will get splattered, some economists fear.
If their finances get tight because of job layoffs or rising interest rates, many consumers would pay off credit cards and curb their buying of appliances, cars, TVs and other items, economist Tucker Hart Adams warned. Reduced consumer spending, in turn, would trigger an economic slump in the Springs and the rest of the state, she said.
I think we’re living beyond our incomes in the short term, and that’s nice because it creates jobs and keeps the factories busy,” said Adams, chief economist for U.S. Bank in Denver and a Colorado Springs resident. But in the long term, it’s not sustainable.
People sometimes say we don’t have a problem in Colorado,” she said. Well, we do.”
‘FLIPPING’ HOMES LESS COMMON HERE
For now, Colorado Springs housing prices don’t appear to be the problem they might be elsewhere.
The latest quarterly report by the Office of Federal Housing Enterprise Oversight shows home prices increased 7.8 percent in Colorado Springs during the second quarter of 2005, compared with the same period a year earlier. In Los Angeles, home prices increased 25.1 percent; in Las Vegas, it was 26.9 percent. In Denver, second-quarter prices rose 4.4 percent compared with the same period a year earlier.
Other markets have seen huge price increases, partly because of investors who buy properties with the intent of selling them — flipping” them to make quick profits, said Springs economist Dave Bamberger of Bamberger & Associates.
That kind of speculative buying hasn’t occurred to the same degree in the Springs, and, therefore, prices haven’t risen as dramatically as in other markets, he said.
mortgage insurer PMI Group Inc. of Walnut Creek, Calif., has charted 379 housing markets nationwide and determined the chances of a significant drop in home prices over the next two years.
Colorado Springs’ risk is 6.9 percent, compared with 16.9 percent in Denver and nearly 33 percent in a red-hot housing market such as New York.
CREDIT WHERE CREDIT IS DUE
While local housing prices remain in check, comparatively speaking, the Springs’ collective credit score suggests consumers are doing OK when it comes to their ability to obtain financing and pay their debt.
Experian, one of the nation’s three top credit-reporting agencies, gave the Springs area —including Pueblo — a not-too-bad credit score of 669 in July, the latest monthly figure available.
Credit scores — derived from a formula that includes individual debt and the number of times one has made payments late — are important; consumers with higher scores are better credit risks and more likely to repay their debt.
Good scores also can help consumers obtain lower interest rates on loans, although other factors such as employment and income come into play, too. Generally speaking, consumers need a credit score of 620 to qualify for conventional loans.
The Springs’ combined score of 669 is slightly lower than the national average of 678 and a few points below Colorado’s average of 674. Denver,
grand Junction, Salt Lake City and Cheyenne, Wyo., had higher scores; the Springs, however, scored higher than Albuquerque, N.M.; Austin, Texas; Dallas and Las Vegas.
Hutch Hutchison, part-owner and vice president of Auer Colorado Online
mortgage in the Springs, said he didn’t expect the Springs’ score to be as high as it is. After all, he said, the city was battered by layoffs and business closings after the recession and the Sept. 11 attacks.
And the fact that this is such a low-paying town,” Hutchison said. With foreclosures, layoffs and everything that hit our community, I believe that’s (669) a worthy score.”
The city’s credit score is made of several components that suggest how local consumers are faring when it comes to debt.
One such component: how much consumers owe on their credit cards, car loans and other revolving and fixed-rate payments — bills other than
mortgages. Area residents owed an average $12,007 in July, $515 more than in June. Nationally, the average was $11,674 in July; statewide, it was $12,290.
Fred Crowley, a University of Colorado at Colorado Springs economist, says the Springs’ credit score probably has been dragged down by its young population; college graduates with hefty student loans don’t earn as much as veteran jobholders and don’t have as much to spend, he said.
Thousands of lower-paid military personnel in the Springs also probably contribute to the city’s lower credit score, said Tom Craddock, education manager for the Consumer Credit Counseling Service of Southern Colorado. The nonprofit organization advises consumers on debt problems.
Something else about Colorado Springs’ credit score: it’s a combined figure for the Springs and Pueblo. Craddock suggested lower incomes in Pueblo might weigh down the combined Springs-Pueblo score.
STILL, SOME TROUBLING SIGNS
But housing-price stability and solid credit scores aside, some experts think local consumers should be cautious about their finances. Already, there are some troubling indicators:
- Bankruptcies for the first seven months of 2005 in the Springs, Pueblo and southeast Colorado are running nearly 8 percent ahead of the same time last year and are 43 percent higher than for the same period in 2001, according to the U.S. Bankruptcy Court for Colorado. It should be noted, however, that many consumers might be filing now before a federal bankruptcy law takes effect Oct. 17 and makes it tougher for consumers to wipe away their debt.
- El Paso County foreclosures reached a 14-year high in 2004, although they’re down 2.5 percent this year.
- Consumer Credit Counseling says its counseling sessions this year are running nearly 25 percent higher than last year.
Craddock said some Consumer Credit Counseling clients pay far too much of their paychecks toward their housing costs. Some consumers pay 46 percent of their income for
mortgages; the figure should be about 25 percent, he said.
Consumers stretching to make housing payments aren’t saving money, Craddock said. If a major car repair or other unexpected expense comes along, they pay for it with credit cards and add to their debt load.
Bamberger said a worst-case scenario could be a housing price bursting in other markets, which leads to a recession and, eventually, layoffs in the Springs. Local residents who lose their jobs won’t have money to pay
mortgages and credit cards.
Springs residents who have
refinanced their
mortgages and taken money out of their homes — using their home equity to pay for vacations, cars or college educations — won’t be in as bad a position as homeowners in hot housing markets, Bamberger said.
People (in Colorado Springs) might have ‘re-fied,’ but not on the strength of prices doubling over a few years,” Bamberger said of markets such as California. Even if they have ‘refied,’ a drop in the market may not be a dramatic drop. But still, there’s an exposure if you lose your job and have a lot of debt. That’s a problem. But not as bad as in California.”
Adams doesn’t think a housing bubble is the only potential problem. She worries that homeowners who have bought homes with interestonly
mortgages must start making principal payments in a few years, on top of the debt they’ve amassed.
When they have to make a choice, they’ll pay bills and stop consuming — crippling the economy, she said.
We fool ourselves by saying that somehow, because we haven’t seen homes increase by 25 percent, that we don’t have a problem,” Adams said of Colorado Springs. It’s a debt bubble, and the house problem is one piece of it.”
CONTACT THE WRITER: 636-0228 or rladen@gazette.com
What’s the worst that could happen?
The Associated Press asked several experts to discuss these potential disasters and to offer a rebuttal to those doomsday scenarios.
CREDIT CARD CRUNCH
Outstanding balances on credit cards have risen to more than $800 billion, or about $7,200 per U.S. household. It’s more than double the indebtedness of a decade ago — and it doesn’t include an additional $1.3 trillion in debt for cars, appliances and personal loans.
What if interest rates suddenly shot up, say 3 or 4 percentage points, requiring borrowers to greatly increase the amounts they have to pay each month on their debt?
It would undermine the housing market, and could quickly result in credit problems that would affect the entire (American) financial system,” said Mark Zandi, chief economist at Economy.com, a forecasting firm in suburban Philadelphia.
Such an event isn’t beyond the realm of possibility if global investors, for instance, shift their money out of the United States or if a terror attack riles financial markets.
THE REBUTTAL:
Skeptics don’t see a big economic shock in the offing. Economy.com’s Zandi said interest rates are most likely to go up at a measured pace, giving most consumers time to adjust to higher payments, and some might see their credit limits cut.
mortgage MANIA
Americans have taken on more than $8.8 trillion in
mortgages to buy homes, up an astounding 42 percent since the 2001 recession. And
rapidly rising prices in recent years have made many homeowners feel wealthy.
But that run-up in prices increasingly looks like a bubble. What could burst it?
Interest rates going up just 2 percent would do it,” said Peter Morici, a business professor at the University of Maryland in College Park. That, he said, would suppress prices, lower sales and put a squeeze on those who were marginally qualified to buy.
Some people will lose their homes,” Morici said. Many people will just be hurting.”
THE REBUTTAL:
Doug Duncan, chief economist for the
mortgage Bankers Association trade group in Washington, D.C., acknowledged that there could be tiny bubbles,” particularly in Las Vegas and along both coasts.
But most buyers, he said, see their homes as a place to live or to retire, with appreciation as the frosting on the cake.” Duncan also thinks the Fed is sensitive to the potential impact higher rates could have.
GLOBAL MONEY MART
China’s growing exports to the United States are a major factor in the explosion of the nation’s trade deficit, which could exceed $700 billion this year. At the same time, China is one of the largest foreign investors in U.S. Treasury securities, with its holdings of $244 billion.
If China stopped buying U.S. securities, or even started dumping them, it would send the dollar into a tailspin. That would make imports more expensive and could push interest rates up.
THE REBUTTAL:
C. Fred Bergsten, a former U.S. Treasury official who heads the Institute for International Economics in Washington, D.C., noted that China said in July it would no longer peg the yuan strictly to the dollar.
Even without that announcement, Bergsten thinks it would be crazy” for China to alienate the United States. The reason: China needs America as a major export market to fuel its own economic growth and to create jobs.
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