Charm City Baltimore Real Estate: Baltimore, Maryland Real Estate & Homes

As we begin the last month of the year, I wanted to review where we stand in the real estate world, both nationally and in Maryland. 2010 will be a critical year for many of us, not only for those involved with property, but for the economy in general.

We’re certainly better off in this holiday season than we were a year ago. At the end of 2008 the country felt like a roller coaster car speeding down the tallest slope with no brake and nobody at the switch. Right now, 2009 looks like the turning point, with the economy beginning its long climb up the next hill, real estate stabilizing and just in need of a little push to get back on the track. But there are several issues looming for next year which will really determine how things go for the forseeable future. Here are a few lumps of coal for your stocking:

• A recent Washington Post article quoted a national survey by the Mortgage Bankers Association which found that more than 14 percent of borrowers were in trouble on their mortgage. That translates into 7.4 million households either currently delinquent or in the foreclosure process, the highest level this particular survey has ever recorded. That means we have not seen the peak of foreclosures — and with unemployment continuing to rise the numbers will only get worse.
• The Baltimore Sun, again using information from the Mortgage Bankers Association, reported that in Maryland roughly 10 percent of homeowners deemed good credit risks were in trouble with their mortgage. We’re not talking subprime mortgages here, the widely known source of the financial troubles, but prime borrowers. Again, blame rising unemployment which has destabilized the family budgets of people who have had a history of prudent financial management. In round numbers, this adds 77,000 homeowners to the list of those at least one month behind on their payments.
• Recent widely reported gains in regional home sales and a decrease in the housing inventory seems to be coming from short sales and foreclosures going under contract (and not necessarily going to settlement). From my anecdotal sources, traffic on regular owner-occupied listings — where a bank is not involved — is practically non-existent. This means that unless you’re in distress and buyers smell blood, they aren’t interested in seeing your listing. And, as we saw in the last item, there could be 77,000 more properties on that distressed list that we have to work through next spring.
• Most of our buyers, especially first time homebuyers,  in the last year have used FHA loans because they had the least stringent requirements for credit score and money down, and allowed more generous assistance from Sellers. So while the extension of the tax credits until the end of June, 2010 is a wonderful thing, it seems to be coming with a simultaneous tightening of credit from the FHA. The Washington Post reports that new FHA guidelines currently under development will raise the amount of money required from buyers — from 3.5% of the purchase price to 5% of purchase price — while cutting the allowed Seller contribution in half (from 6% to 3%). Not only will this shrink the pool of qualified buyers considerably, the FHA will also raise the capitalization required from lenders who issue FHA insured loans — a move that will most likely cut the number of loans available, if not the number of lenders who will consider issuing them.

Certainly the situation in residential real estate is worrysome as we head into the new year. But it might not be the most dangerous. Many experts are warning that the biggest problem looming on the horizon is in the commercial real estate market, as last week’s potential meltdown at Dubai World illustrated. While that particular sovereign wealth fund made European markets tremble, and we were told that the US market has little exposure to it, there are enough potential problems here at home to make us weak in the knees. Moody’s Investor Services reported last week that it expects the value of US commercial real estate to continue to fall well into 2011. This is on top of losses in this sector which have already totalled 42.9% since the peak in 2007. The total devaluation from the peak may well reach 55% before things begin to turn around.

The determining factor in these losses? Yep, you guessed it… unemployment. With fewer people working, office spaces and commercial spaces don’t need to be as big. Demand for office buildings drops, and fewer companies are growing and demanding more space from their landlords. Also, with more people encouraged to buy homes and get their tax credit, demand for multifamily rental units has also dropped, hurting landlords’ cash flow and making it more difficult for them to keep up on their mortgages.

Now, with all this coal in your stocking, remember you can’t really burn it anymore to lower your heating bills. Global warming, you know. Ho, ho, ho.

It’s time for me to take a position on a controversial discussion beginning to take place around our offices, and in Washington.

Congress should act quickly to not just extend the Homebuyer Tax Credit, but it should also be expanded to cover more transactions and move beyond first-time homebuyers. Our marketplace is still very fragile. The real estate market, admittedly, was the starting point of this severe recession and needs to be supported so that the “tender green shoots” of recovery continue to grow and spread into next year. We will have new foreclosures entering the market, new short sales, and continuing economic distress long after the current expiration date of November 30. Its likely, in my opinion, that the housing market will shrink in the new year without this stimulus — which could jeopardize the health of the economy. The reasons for extension are perfectly clear.

The argument for expansion is equally compelling. First, the existing first-time buyer credit has jump started the under $250,000 segment of the marketplace, but in our area it has not had a similar effect on ‘move-up’ homes or ‘downsizing’ condominiums. To begin to spread the wealth, and help struggling homeowners out of economic distress, or the growing family feeling the pinch in a terrible economy, expansion of the tax credit to those segments would have an incredible effect on associated businesses and communities. There’s very little stimulus that would have the same impact for each dollar invested, not only in actual capital investments but also consumer sentiment, arresting the slide of home values and shoring them up against further upheaval.

In order to make the distribution of these monies is equitable, the eligible properties could be defined as those falling under the regionally adjusted FHA loan guidelines. That would effectively exclude investors and the very wealthy whose properties would require non-FHA ‘jumbo’ loans. This is an idea whose time is right now.

The stakes have gotten higher in the last few weeks. We’ve had a series of positive news releases; statistics are showing a strong turnaround in the housing market. Here are a few more… sales volume in my one real estate office nearly doubled in July ’09 over July ’08. We’re now at the point where in a few weeks the traditional Autumn selling season will begin, and the questions start to rise: will buyers come back after their summer vacations? Will we see continued support and recovery in the housing market on a sustained basis, or was the spring surge in sales simply a function of long pent-up demand bursting out briefly because of the $8,000 tax credit?

Economist Robert Shiller, he of the Case-Shiller Index, is a gloomster at this point. In a recent interview with CNN Business Correspondent Poppy Harlow, Dr. Shiller gave all sorts of reasons why the current uptrends in housing might be a mirage that will melt away in the desert heat of August. This interview, given before last week’s unexpected good news on slowing GDP losses and slight drop in unemployment, was based in part on the common wisdom of what these reports were supposed to be, not on the surprising results they actually gave. Which, in my opinion, only goes to show that economists have a tendency to trust their own predictions much more than anyone else does.

Certainly there are tough times ahead. But, there is a growing sense that the worst is behind us, and that is something that I believe is true. Now is the time for renewed investment in real estate, and for first time homebuyers to get in there and grab that $8,000 credit. Like “Cash for Clunkers,” its a government rebate that is working to give short-term and immediate stimulus to a devastated segment of our economy. It should be renewed to last into next year.

Recent economic statistics and recent opinion polls are showing a peculiar dissonance in the public mind.

On one hand, economic news lately has been predominantly positive. Unemployment, while bad, has not risen as fast as had been predicted and there is even some evidence that its slowing and may be in the process of turning around. Housing news has been (and I feel will continue to be) positive, as residential resales and new home construction have both increased at surprising rates this spring. Even media outlets that tend to look on the dark side all the time (are you listening, Baltimore SUN?) have written headline stories on the positive trends that are developing. It would seem that economic stimulus, an increase in positive consumer sentiment, and other factors are turning this recession faster than had been predicted just six months ago. Great news, right?

Then how can the news be explained that a growing number of people are dissatisfied with the performance of the new administration and are losing confidence that the stimulus and the new government spending, regulation and other initiatives aimed at the recession will work? It would seem that the evidence is all around them, that it will — and is working — right now.

I have a couple of theories. First is simply that as a nation our ability to wait for good things has been severely diminished over the last 30 years. If its hard, if it takes awhile, and if it requires personal sacrifice, we don’t like it. We lose patience quickly, and blame the very people whose policies and principles are necessary to achieve the goal. Second, as a body politic, we have not yet managed to shake the poisonous habit of the last decade of shouting doom and gloom and twisting reality simply to fashion a hammer with which to beat up the other side. This has begun to achieve Orwellian dimensions… no matter the reality, no matter the truth… simply say the lie often enough and some people will believe it. And as more people join the Falsehood Chorus, more people believe. Passionately.

In my own personal life, I’ve seen friends who I have always credited with being smart, reasonable people become raving lunatics by repeating things that they have heard that are simply ridiculous. And believing them.

This gives me unease, both for the future of the efforts to curb this recession and return us to economic health, and for the future of the country. But as long as the public rewards the liars, the lunatics, the hatemongers, the loud and bombastic over the truth seekers and the reasonable explainers… we will be condemned to travel the wrong paths.

Shades of 1929.

While the financial markets are involved in daily triple-digit fluctuations, major financial services companies are in danger of going under or being bought at fire sale prices, and economic statistics and Federal Reserve actions unseen since the Great Depression are being reported, the President of the United States is in front of the public saying that everything is fine. The State of the Union is strong. The danger is in over-correcting, like the proverbial pickup being driven through a “rough patch” and we don’t want to “end up in the ditch.”

At least Herbert Hoover could utter an educated, well-parsed phrase.

He ended up being just as wrong, just as short-sighted, and just as reviled by history as this president will be for being so insulated in his wealthy, privileged world that he had no clue that gasoline would soon reach $4 per gallon. “Really?”

The housing/financial mess was caused by a lack of oversight and regulation. Pure and simple. Each time I hear an explanation of mortgage-backed equity instruments, and how we got to this point, I’m reminded of the fictional Gordon Gekko’s mantra, “Greed is good.” Lots of people made lots of money, and most of them have gotten their golden parachutes and are no longer to be seen. We’re left cleaning up the mess while the buffoon in the White House (and his Republican clone campaigning to replace him) continues to assert that the least action is the best action.

There needs to be federal licensing and regulation of mortgage brokers, strict oversight of lending practices and the information given to prospective borrowers, and a revival of the Depression-era home loan bank so that the government can buy out the mortgages of people who were duped, lied to, or otherwise abused by the system and are now in danger of losing their homes. Let’s let the government rely on the strength and honesty of the working poor and middle class for a change, instead upon the greed and avarice of the upper 1%.