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

No one has been more affected by the last few years of real estate devastation than my old friends, the Sellers. If its been more than five years since you’ve sold property, then you really need to forget much of what you thought you knew about the process. Its a new world out here. So as we approach the beginning of the Autumn selling season, here are four points that every Seller needs to take to heart.

1. You were never as rich as “they” said you were. Who are “they”? Appraisers, bankers, even the algorithm at Zillow… but its not their fault. In most cases (except probably Zillow) they were giving you valuations on your home based on what was current market price. Unfortunately, most property owners took this inflated value and carved it in stone under the heading of “Personal Net Worth” and — even to this day — are having a difficult time adjusting to the fact that those monumental numbers just are not true. But if you own a stock and you want to sell it, you ask the question, “What is Triple Y Corporation stock selling for today?” Not last year. Not in 2007. If you try to place a sell order on Triple Y that is based on what the stock sold for in 2007, your stock broker will laugh you out of the office.

Selling your home works exactly the same way. And just like the stock market, that valuation is different today than it was three months ago, as values have continued to go down in most markets. If you list your home for sale today, you need to think about what the value of it is TODAY, and kiss farewell to what you thought it was worth yesterday. You’ll also likely have to re-think the asking price if you should be on the market in two months, because the market may continue to decline.

2. You are selling a product and a lifestyle — not just a house. You need to find out what the competition looks like. Get your Realtor to take you through the properties that you’re going to compete with in the marketplace — certainly every one of your potential Buyers will have seen them, so you need to see them too. The Buyer doesn’t really care how you’ve lived in the house, they want to see how they might be able to live if they bought your house. By comparing your home to the competition, you get to see the competing visions that are out there, and you can craft your product presentation to outshine the rest. This is the basic philosophy of staging, and you can use it to varying degrees, but if you’re not actively trying to change the way you think about and look at your home and trying to see it through the eyes of the Buyers who tour it, your home will likely be one of those that sit on the market for awhile, with multiple price reductions, and a sales price much lower than you had hoped.

3.  Some of your competition isn’t trying to turn a profit. Now, this is a tough one to wrap your head around if you’re a Seller. Every individual Seller approaches a real estate transaction with visions of finally-realized equity with which they will fund something, whether its a bigger house purchase, a downsizing with money left over for a new toy or a beefed up IRA, or at the very least, a clean balance sheet with debts paid off. In this market a significant number — if not a majority — of your competitors have already given up on making a profit. These could be residents approved for a short sale, or banks and mortgage companies — even the government — selling foreclosures, or people who have been on the market so long that they are desperate just to get to that new job in another city. This is yet another argument for getting to know your competition, and if you can’t compete with their prices, then figure that out before you list and save yourself a lot of heartache.

4. Buyers don’t shop for homes the way they used to. The process that Buyers use to become educated on the market has been completely revolutionized in the last few years. The National Association of Realtors conducts a study every year that asks successful homebuyers questions about the process of buying their home. The results are important because they point out the most successful ways to market a home — and marketing a home is THE most important task that a listing agent performs. In just the last decade, the percentage of Buyers who found the home they purchased on the Internet has skyrocketed from 8% to 37%. Those who found it in print advertising, such as newspapers, has gone from 7% down to only 2%, and if you look just at those slick homebuyer magazines, the current number is below 1%. Even the trusty yard sign, which accounted for 15% of discoveries in 2001 has declined to just 11%.

So, what does this mean if you’re the Seller? It means that among the most important qualities you need to look for when selecting a listing agent is that agent’s comfort level with mobile technology and the Web, because that is where most homebuyers are hanging out, looking around, and eventually deciding on which homes to visit. And don’t doubt that you DO need an agent. If you combine the Buyers who found their homes on the Internet and those who found them through the recommendation of their agent, you account for 75% of successful home purchases in 2010.

That’s a chunk of the marketplace that you must be able to access if you wish to sell your home in 2011.

Every real estate agent I know is thankful that 2010 is nearly over. When the year began there was a lot of hope that the housing market would begin to recover by year’s end, and the Federal Homebuyer Tax Credit was stirring people to buy — boosting that hope.

But when that credit expired, hopes for the recovery began to expire as well. One of the hottest summers in memory kept people inside, and the economic news kept us all sweating. Late summer and early autumn sales numbers retreated back to levels that were equal to the worst of the housing slump.

Never mind that housing prices continued to fall and started to look like good values again, or that mortgage interest rates had fallen to levels that hadn’t been seen since our grandparents had been buying homes. No amount of good news could convince the buying public that it was time to make a purchase.

One of the most important trends of 2010 is only now beginning to become plain: the huge number of properties in distress — either 90+ days late on the mortgage, listed as a short sale, in pre-foreclosure, or actually foreclosed upon and bank-owned — was creating a large “shadow inventory” of homes that lenders were not listing for sale because buyers were not absorbing the distressed properties that already were on the market.

There are a couple of sources for this information. In late November, CoreLogic released a report on the large increase in the “shadow inventory” in 2010. As of August, there were 2.1 million units of housing classified as being in that shadowy group, up more than 10% from the previous year. When added to the 4.2 million “visible” units currently for sale, that constitutes a distressed property glut that isn’t moving. According to CoreLogic’s report, Maryland has a two-year supply of such distressed properties; the figure for Baltimore-Towson is only slightly better, with an 18-month supply.

While the sharp and rapid rise in the number of properties included in this category is alarming, at the same time overall sales figures were falling, and the proportion of distressed homes within the number being sold also fell. According to the National Association of Realtors’ 2010 Homebuyer Survey, only four percent of buyers purchased a home that would be categorized as “distressed.” Nearly 40% of those buyers did not even consider a distressed property among their home choices. Of the remaining 60% who at least considered such a home, one-third decided against it because the process of dealing with the lender as seller was too difficult or complex. One-fourth decided against it because the house was in poor condition; the remaining buyers just couldn’t find a distressed property that they liked.

What does this mean? Different professionals will come to different conclusions about this data, all of which was just released at the end of November, but here are two things that I believe are clear:

1. Buyers are learning that purchasing a distressed property, especially a short sale, is not easy and the vast majority of them are opting not to do so. Since half of all homebuyers in 2010 were first-time homebuyers, it might be that the uncertainty of how long it will take to settle such properties makes them impractical. While these first-time buyers don’t have a home to sell, they do have a landlord who requires a set amount of notice to get out of their lease — give notice too soon, they might become homeless; give notice too late, and they might be required to pay extra rent. If lenders want to make these distressed properties more attractive to these buyers they have to standardize the short sale process and get it done in a predictable amount of time.

2. Lenders may have to hold back millions of dollars worth of ‘shadow inventory’ well into the future. That means maintaining these properties in liveable condition for an extended period of time. Most lenders are NOT good at this. While they want to get their money back on these properties, they cannot flood the market with them all at once. Not only will that drive down the price on the properties for sale, it will also drive down the values on the neighboring properties, putting more homeowners “under water” and destabilizing the neighborhood. Since that lender may also hold the mortgages on a significant number of properties in the vicinity, flooding the market with bank-owned properties just drives down the values of the rest of their investment portfolio. So, while they won’t like the idea of holding on to these properties, self-interest will demand that they do.

There are many indicators that actually give hope for a much better 2011. I’ll cover those in January’s post.

I hope all of my readers have a peaceful holiday season, and best wishes for a prosperous new year!

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While the market has been flooded with good news in the last few weeks, an end of the year reflection still shows we have lots of work to do in the new year.

For a transcript of this podcast, please email me at .

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.

We’re now less than 24 hours since the Obama Administration announced the shape of the housing rescue package that will be TARP2. The short-sightedness of much of the opposition in their attacks is truly appalling. Many of their politically motivated arguments have been widely debunked by other sources, but the “moral hazard” argument is the one that bothers me the most. Lender statistics show that once a property is 90 days behind, the ability of a borrower to have a successful renegotiation of their mortgage is severely compromised. If we are going to truly avoid some of the foreclosures that are coming, the renegotiation has to begin while the struggle is still somewhat successful — while the borrower is still current, but when they know they are at the end of their rope. That’s how you prevent a property from becoming a foreclosed property.

The people who argue that is an unnecessary “bailout” which punishes the “people who have played by the rules” and have cut back, saved, etc. to be able to live within their means is really a straw man. It needs to go away. The folks who will be helped by this package also “played by the rules.” But for reasons beyond their control… declining housing market prices, loss of work, medical problems… they are fast sinking and will soon go under. There is no “moral hazard” in this program. Speculators and people who got in trouble by living beyond their means are specifically omitted from it.

And what about their neighbors who “played by the rules” and are making it by ok? They will be helped by the fact that the house next door does not go into foreclosure, presenting a potential haven for illegal activity, and dragging down their property values by another 9-10%. Their community will benefit from having homeowners staying in their homes, not being sold to an investor at a bargain price who will bring in renters who may, or may not, value the quality of life in the neighborhood, maintain the house, cut the lawn, trim the trees, shovel the walks, etc.

In short, these carping critics would have criticized Christ for hurting local fishermen and bakers by performing the miracle of the fishes and the loaves. I say we need a miracle right about now.

In the last few months we’ve seen a growing number of so-called “short sales” in our market place, and around the country. While the name implies that the sale will leave the borrower “short” of the full amount needed to pay off the mortgage, there’s nothing “short” about the amount of time it takes to actually accomplish the sale. Short Sales, in fact, take forever. In 2008 I personally had clients who tried to buy a Short Sale. After eight weeks of waiting, the case had barely budged through the bureaucracy at Wells Fargo, and we were told it would take at least another eight weeks to be processed and reach the settlement table. National City, to their credit, had cleared the property within two weeks, since they had the second mortgage and were most likely not going to get a cent. My clients, who were purchasing a primary residence, simply couldn’t continue to put their future on hold. We found another house.

This one experience is an all-too-common example of what Short Sales are like. They are the real estate equivalent of Chinese water torture. In the past more than 80% of them fell apart before they could settle. Not exactly an efficient model of disposing of bad assets, eh?

So, its with some relief that we read that Fannie Mae is field testing a process that will shorten the time it takes to achieve a Short Sale. Relief, that is, until we read just what the process IS.

Our brightest financial minds have come up with a plan to “pre-approve” a property for short sale, even before a buyer has been found. Its proponents say that it will save the paperwork and bureaucracy of trying to find out what amount of loss Fannie will take and allow the purchase to proceed much more rapidly. Huzzah!

Except that the short sale I was involved with never got to that point after eight weeks of waiting. Wells Fargo had just gotten around to appointing a negotiator for that property to begin the process with Fannie (and meanwhile, the foreclosure department at Wells had started implementing foreclosure, blissfully unaware that there was a contract pending in the short sale department). And what about the fact that most properties are spending so much time on the market waiting for a buyer that the property might actually depreciate from the time the value was determined and approved and the time a contract is written. Oh yeah, and will the buyer try to negotiate down from that price? YOU BETCHA.

This “new process” is another screwball idea from the people in Washington who didn’t see the problem coming. President Obama seems to be coming around to the point that the previous administration’s appointees never reached… just take over the bad assets. Get the commerical banks out of the picture, get these mortgages off their balance sheets, and lets revive the housing sector. Once these assets are fastracked for disposal, the short sale process can truly be streamlined. Nothing else will really do the trick.

You have to wonder if the American public has truly entered a post-reality era… maybe all the fake reality shows on television have finally had their mind numbing effects, proving to anyone who was paying attention that reality isn’t and it is all based on your attitude.

That’s about the only conclusion you can draw from the result of a recent poll by Harris Interactive, commissioned by our old friends at Zillow.com. They got answers from 1,361 homeowners across the country, and (as reported in a recent Wall Street Journal) a whopping 62% of the respondents thought that the value of their home had actually increased in the previous 12 months.

That’s right. INCREASED.

Never mind that Zillow’s own terribly flawed and unreliable data (see one of our previous posts) shows that 77% of all homes in the US depreciated in value over the same time period. The poll was conducted between June 30 and July 2, 2008, so maybe people’s brains were just overheated from hot summer weather. But 56% of the respondents also said that they would be spending money to improve their “more valuable” properties over the next six months.

The “can’t happen to me” psychosis gets even deeper when you probe the public attitude toward the foreclosure crisis. Even though 90% of the respondents knew that foreclosures were occurring in their local market and 80% felt that the rate of foreclosures would remain steady over the next six months… a full 48% of them opposed government efforts to assist such homeowners to stay in their homes.

What should those of us in the industry make out of such “Twilight Zone” attitudes? We will have to try harder to educate potential Sellers, and perhaps take them on preview tours of the competition to fight the idea that their property is the “best in the neighborhood.” Like addicts coming off of a pretty good high, homeowners still aren’t ready to go “cold turkey” and realize that real estate investments sometimes go down. Including their own. We can either support their addiction and continue to list properties at unrealistic prices, or be the ones to stage an intervention and tell them the truth.

I think our Code of Ethics compels us to be the truthteller.

We’ve been told for years that our society has become too statistic based, and that the business-governmental apparatus that collects information on all of us is too large, too intrusive and overly bureaucratic. And in some aspects of life, I think that’s absolutely true. So its a total shock when you come across situations where we are completely incapable of getting a clear picture of what is going on. Certainly the current scare about the source of the salmonella outbreak is one of these cases. Two months into it, we have no clue about the source of the little nasties, and an entire agricultural industry is in shambles because of early — incorrect, we think (?) — guesses.

You’ll be surprised to know that this applies to the foreclosure crisis. An article in today’s Wall Street Journal (Friday, July 18, 2008) reports that there are many contradictory statistics about the “Mortgage Mess.” Three major companies publish data on mortgage foreclosures, but the way that they collect it and the frequency with which they take their surveys has a major effect on how the data is interpreted. There is NO federal regulator charged with regulating mortgage brokers and originations; no one collecting the data for the government, so the Congress’ Joint Economic Committee (you know, the committee drafting legislation on the issue!) is reliant upon these three companies and their confusing information.

In the words of the Journal’s reporter, Carl Bialik, “All the data providers agree that foreclosures have been increasing, but details matter in deciding which kinds of loans, in which places, are at highest risk.” The track record of some of these companies’ press releases is shoddy. Again, quoting from Mr. Bialik, “Last July, the system” employed by the best known of the companies, RealtyTrac, “stumbled in Georgia, counting some properties multiple times. The company had said filings rose 75%, but revised that figure to 14%.” Oops.

What do you bet that this sharp downward revision to 14% didn’t get the same screaming above-the-fold headline that the original shocking 75% figure did?

The companies also do not agree on where the mortgage hot spots are. Several states appear on all three companies’ “top five” lists, although their ranking varies. But other states pop up on some and not others. The state of Colorado, for instance, regularly appears at or near the top of RealtyTrac’s recent rankings, but squarely in the middle of the pack on the other two company’s rankings. The Mortgage Bankers Association complies its lists quarterly, so by the time its information is released the data is old news. RealtyTrac, by comparison, races its monthly data out in 8 or 9 days — perhaps the reason it can be so dramatically revised. The third company involved is First American CoreLogic, which doesn’t race its data out and doesn’t issue press releases.

Let’s hope that cool, competent analysis of accurate data results in the best legislation possible to deal with our impending foreclosure crisis.

Pshheft. Who am I kidding?!