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

Watching a PBS evening investment show last night, I was suddenly face to face with a nice looking, silver-haired gentleman who was ardently pushing stocks as the only investment that really paid off in the long run. He looked the part of the sage advisor, and was slinging his hash with a smile on his face. “Exactly what I’d expect a stockbroker to say,” I thought to myself.

One of the primary theories put forth by NAR Chief Economist David Lereah is that the current stock boom — past Dow 12,000 and now 13,000 in an amazingly short time — is in part due to the fact that the housing boom is over and that lots of investment money has been shifting out of the nation’s housing stock and into equities. I can only imagine that this is a normal, routine cyclical process.

There are gallons of statistics that get thrown around in this debate: annual average return of the stock market vs. real estate appreciation, pros and cons of the taxation of real property vs. equities. In the end, you need an accountant to really give you an idea of which does best for you in your tax bracket, with your tolerance for risk and so on. But this kindly looking gentleman on the television last night made it seem so cut and dried. Stocks win. Game over.

Call me a skeptic. Perhaps I have too many memories of the stock bubble of the turn of the century. How many of us real estate folks got 100 shares of the Realtor.com IPO, watched it soar to be worth tens of thousands of dollars and then fall to earth again before the rules of the IPO would let us unload it. I won’t even go in to my well thought out investment into the now non-existant Pets.com. Or the fact that I managed to buy into Microsoft just as it went from technology high-flyer to stagnant behemoth. Vista, shmista.

The fact no one wants to admit is that hardly anyone really makes ‘average’ returns. The average is just that: some statistical melding of all the people who make good, educated or downright lucky decisions with those who don’t. I’ve shared some of my dogs, but I also have made some good stock investment decisions over the years. But my average is dragged down by my losses and, as I age, I feel even more sorry for the folks who were planning to retire in 2000 or 2001 and who saw hefty percentages of their retirement income vanish almost overnight.

I’ve also lost money in real estate too — and made some. But the numbers we’re talking about pale in comparison to the amount of money that has vanished into thin air on the whim of the equities market. Most Americans — although they may be tied to the Dow Jones because of the equities in their 401k retirement plans — still view the stock market as too risky for people with average jobs, moderate incomes and some level of education less than an MBA. Although technically a slice of a business, a stock certificate is really only a piece of paper. You can’t live in it, rent it out, develop it, or sell it for a substantial sum even in the worst of times. The number of large, supposedly solid, companies who have ended up in bankruptcy in the last decade point out that its not just the Pets.com’s of the world who disappear in a squall of worthless paper. That’s one reality that the smiling gentleman on television just doesn’t want to talk about.

Real estate, on the other hand, is a market that is much easier for most people to understand. They have a mortgage, so they know what it means when rates are high or low. They see the “For Sale” signs on lawns or in windows and they know when inventory is high or moving briskly. They know when people are losing their jobs and economic growth is sluggish, which means that property might not be in demand right now. They know what neighborhoods are desireable to them and which ones are less attractive. As professionals, we have the responsibility to provide the specific information that helps our clients make educated choices about a particular piece of property — but in the end it is their decision to make, and most people feel qualified to do so.

The stock advisor ended his commentary by admitting that everyone should own their home. But he definitely left the impression that other investments should be in stocks alone. I’m sure that’s what the inhabitants of the financial markets dream about.

I don’t think its a good idea. And I don’t think that most citizens do, either.

The public doesn’t know, nor do they appreciate, how often we work for free. Worse yet, they don’t know how often we work, pay for advertising and actually LOSE money on properties that don’t sell, buyers that don’t buy, or deals that don’t happen.

When I first became a real estate salesperson and I saw the part of the buyer agency agreement where you could specify a retainer, I laughed to myself. I didn’t take the idea seriously, mostly because I knew how difficult it would be to get buyers to do it. While homeowners just expect that we will put out gobs of our own money to sell their property, despite their stubborn resistance to our marketing suggestions and pricing advice. Then, without doubt, they will complain about our commission to whomever they speak — particularly when their house doesn’t sell in two weeks like it would have if it had been listed two years ago.

If it weren’t an antitrust violation, I wish that we could band together to demand retainers from buyers and sellers upfront, to help keep THEM as serious as they want US to be. The buyer who has some serious bucks invested in their chosen agent would be less likely to make that choice lightly, abandon that agent at the drop of a open house sign, or waste hours of time and gallons of fuel before deciding that the time just isn’t right for them to buy now. Thank you so much for your efforts. Buh-bye.

Imagine how open a seller would be to our marketing advice and suggestions on pricing if they had to pay a lawyer-style retainer upfront for our services — which they would only recoup out of the total commission when the house settles. I can foresee a lot fewer temper tantrums and unreasonable last minute demands at the settlement table if they had an initial investment in real estate services on the line.

But, of course, all of this is wishful thinking. Such appreciation for our services will never spread among the general public when many of our colleagues don’t have the same appreciation for THEIR own reputation, time and service. Given the ‘self-employed contractor’ model which is the standard in this industry, you have so many people willing to ‘cut corners’ or sell their soul for a commission that the amount of the commission itself always seems to be open to cost cutting.

We can’t expect the public to value our time and service until we do. Period.

The news a couple of weeks ago was fairly stark. In the first two months of the year 2007, a study of 18 major markets showed that only two of these markets had seen a decrease in real estate inventories of existing houses for sale. For the first time in weeks, we were hearing the media blather on again about the ‘bubble.’

The two markets who had the enviable decrease? Washington and Baltimore.

The result was not a surprise to those of us who work in this region. We’d seen bad days, especially last fall heading into winter. The phone wasn’t ringing. But, starting in mid-January, things were beginning to pick up, and the first quarter was starting to look pretty good as contracts, settlements, and new buyers were coming in at a nice pace.

The movement of the two cities into one large economic megaplex has been gradual, and many long-time residents of Baltimore, in particular, may really not be aware of it. Roughly 35 miles separate the downtowns of the two cities. Baltimore has traditionally been the larger of the two jurisdictions, but Charm City falls behind when metropolitan areas are included in the count. Washington’s sprawl has been of epic proportions, especially into Virginia — where smart growth has rarely been talked about and never really seen.

Increasingly over the last five years, Baltimore has been evolving into a different type of bedroom community for the Nation’s Capital. An aging, old-line industrial matron, whose empty factories and deteriorating manufacturing infrastructure has given her a gap-toothed smile, Baltimore has been getting face-lifts around her digital harbor, from new high-tech industry to posh waterfront condominium developments. Several cranes dot the downtown skyline, and new clusters of skyscrapers are rising in previously low-rise districts and vastly expanding her visual impact.

Yet state and federal authorities are ignoring the desperate shape of mass transit in the city, and in how the two cities connect with one another. Light rail and subway plans are talked about in generational time spans, and commuter rail lines between the downtowns are heavily used and overcrowded right now. Highway congestion already ranks as some of the worst in the nation, and the resulting ozone and air pollution alerts make summertime heat and humidity even more unpleasant and unhealthy.

We could be looking and the rebirth of a city, and its evolution into a different kind of satellite city then we have seen before. But without adequate transportation infrastructure, both cities may choke on their own exhaust. This is primarily the responsibility of Annapolis to fix, and the time to start was yesterday.

There are two words around here lately that have struck fear into the hearts of government bureaucrats: structural deficit. It seems that our fair Old Line State needs to seriously overhaul its revenue system in order to meet the challenge of the 21st century, because right now we are looking at falling billions short in the next few years. Our new Governor, to his credit, has asked the General Assembly to give him until next year to study the state government, its structure and revenue sources, so that he can propose a comprehensive plan that will streamline government and try to wring out savings there, as well as changes to the revenue structure that will hold tax increases to a minimum. While delay might seem to be a bad choice, the new administration is only a couple months old, and fully realizes that it will bear the political brunt of whatever solution is put in place. Therefore, they want that solution to be as well-reasoned as possible.

But its rare that adjective well-reasoned can be applied to the knee-jerk approach of a Legislature in full throttle. Many in the House of Delegates and the state Senate want to pass taxes now, in the ‘lets bandaid the problem before it starts to make really bad headlines’ approach.

One of the brainchildren of this group-think is a tax on services, like the sales tax which applies to purchases. This, of course, includes real estate commissions. I’m hoping that the Governor is able to hold off the boneheads who came up with this idea.

My commission is already taxed as income, so now they want it taxed before it gets to my hands, an effective way to double tax a profession. As competitive as real estate is, I’m not sure that we would be able to pass this tax along to the buyer or seller of property — commission rates have already dropped significantly in the last decade.

But let’s say our brokerages find a way to pass this along to the buyer or seller. Maryland already is near the top of the list when it comes to real estate transaction expense. All this will do is make buying and selling property even more expensive, and no doubt catapult us to the top of the list of most expensive settlement cost states. That’s a distinction that we don’t want or need.

Local government has reaped an enormous windfall from the real estate boom of the last few years. So has the state treasury. How much gold can they suck from this golden egg, before the hollow shell is crushed?

Stay tuned… the boneheads in Annapolis might just be willing to find out.

4/2/2007 UPDATE:

The legislature did not move this tax onto the floor in either house. Fortunately, the Maryland legislature doesn’t sit in session but from January to April each year, so they have effectively killed the idea for this session. Be thankful we don’t have a year-round session.

I have long discouraged my customers and clients from using online lenders. As far as I’m concerned, if they don’t have bricks and mortar in the state in which you are residing, who knows what laws govern their operation? What real estate laws and customs are they familiar with? And when mortgage brokers — who DO have bricks and mortar in the neighborhood — can be such problem sources that the State of Maryland has finally begun to regulate and license all mortgage officers, who is looking over the shoulder of the online lenders?

I’ve heard of many situations where out of state, online based lenders balk at the settlement table because they are unfamiliar with Maryland idiosyncracies, such as ground rent, and where buyers find their loan paperwork looks nothing like what they were promised, as far as interest rate, penalties, payments, etc. But a recent article in the New York Times (11/12/2006) brings the ethics of two such online lenders into question.

Bankrate.com and LendingTree.com seem to have been caught with their hands in the cookie jar. A class action suit was filed against Lending Tree last October, claiming that despite their advertising claims that mortgage lenders compete for the buyers who come there, Lending Tree in fact diverts all buyers to their own in-house lender, Home Loan Center, Inc. Home Loan Center then functions like a regular mortgage broker, a reseller of loans from other companies. But no rate comparisons are made, so its unclear whether those companies are actually ‘competing’ for Lending Tree customers, or whether Home Loan Center just makes a scad of money from their own fees.

So all those bankers in the commercial actually work for one company. Lending Tree. Hmmmm.

Bankrate.com settled a class action lawsuit last October in which customers claimed that the lenders advertising on that site promised rates they did not deliver. Bankrate paid $3 million to the plaintiffs, without admitting guilt. That’s a lot of money for an innocent company to pay out, just to keep the trial from going forward. Makes ya wonder, doesn’t it?

So, who IS watching these companies? Seems like just the trial lawyers. I’d keep that in mind the next time you’re looking for a home loan.

Although it might mark me as a modern Luddite, I have always believed that machines will not replace humans at certain tasks. While real estate has become more and more dependent upon the computer in the last few years, and the internet especially, the World Wide Web will not replace the Realtor anytime soon.

Yes, I know, there are other professionals who have not been so lucky. Remember the travel agent? (Yes, children, humans actually used to sell airline tickets and hotel reservations… and no, their names were not Expedia or Priceline.) But in the end, there’s not much variability between one plane ticket and another. The airlines set prices and incentives and there you are.

Houses are something much more difficult to value and purchase. And a prime example of such variability showed up last week in the pages of the Wall Street Journal, after that bastion of conservative capitalism conducted an evaluation of Zillow.com, one of the internet services that claims to be able to ascertain the value of anyone’s home.

To summarize: Humans 1, Internet 0.

To test Zillow against the real estate market, the Journal used direct market data from regional multiple lists for 1,000 transactions that had just closed – too early for that data to show up in Zillow’s database. The overall accuracy of Zillow’s estimates in the Journal study had a median price difference of 7.8%, above or below the actual sales price. Zillow itself lists its median ‘margin of error’ at 7.2%. Not bad, you say? Well, remember that on a lowly $200,000 purchase 7% adds up to $14,000. Not only will that pay a Realtor’s commission and more, it can also exhaust the negotiating room that many Sellers build into their asking prices, or that Buyers build into their opening offer. But that’s just the median.

Zillow was more than 25% off target in 11% of the transactions surveyed. And in 34 of the 1,000 transactions, Zillow was more than 50% off. In one spectacular example of computer wizardry, Zillow underestimated the value of a house by more than $2 million. (For the original Journal article, see the Personal Finance section of the paper, Wednesday February 14, 2007.)

While these computerized estimates of value might be great fodder for dinner party chit chat, its clear that you really need a Realtor to come, take a look at the property and its community, look at the most recent comparables in the private multiple list database, and come up with a Comparative Market Analysis (CMA) the ‘old-fashioned’ way. To do otherwise, is simply foolhardy and could easily cost a Buyer or Seller far more money then they could possible save.

Since the Base Realignment and Closure (BRAC) Commission released its recommendations in late 2005, most informed Marylanders have been told that the roughly 60,000 jobs that are being relocated here will be a boon to the economy, but an enormous challenge to utility, transportation and education infrastructure, and a shot in the arm to the flagging real estate market.

Will it? A recent poll of affected workers at Fort Monmouth, New Jersey indicated that only about 40% were planning to move when their jobs moved. Because of that, the SUN ran a story last week that said the DoD was hiring Maryland workers for new job openings, so that they wouldn’t lose 60% of their workforce all at once when the move takes place. So, although the economic impact will seem to be guaranteed, with Maryland workers getting 60% of these jobs and up to 24,000 new households, the initial indicators are that the majority of the jobs will be taken by people who already live here.

So, is the state of Maryland planning for a big party that will be relatively small? If there really are only 24,000 new households relocating to the state, spread over localities from Anne Arundel, Howard, Harford and Cecil Counties to the City of Baltimore, should the state plan for twice that number?

The decision over these improvements will be made in a very tight budget environment, and the decision must be made fairly quickly in order for the work to be funded and put on the roughly 10 year plan the state maintains. Roads and schools take a while to plan, engineer and construct. The O’Malley Administration needs to look carefully at what needs to be done and avoid over expenditure. And localities and the real estate industry — builders and brokers — need to temper their expectations. The golden egg might just turn out to be a lump of coal.

Last month, the Baltimore SUN did a series of articles detailing some of the excesses that have taken root in Maryland’s archaic, feudal ground rent tradition in the years of the real estate boom. And there are excesses. Its stupid that someone can take away your house for an unpaid ground rent of $24 per year, as happened to one of the unhappy homeowners in the newspaper’s series. Several specific real estate agents took a lot of heat in the articles because acting as renovators and developers, they actually created new ground rents in the last few years. And the industry as a whole was portrayed in vaguely unflattering terms as looking out for the interests of the evil, greedy ground rent holders.

The SUN *loves* to create black and white dramas, filled with Snydely Whiplash-style villians and Polly Purebread-style victims. And as usual, the truth is more nuanced.

The real estate industry is normally slow to jump onto reform bandwagons where the rights of property owners is at stake. And whether or not you like the ground rent system, these people have legally bought the rights to collect this money and its been a part of the legal legacy of Maryland for close to 300 years. This is a good thing, since property rights are one of the mainstays of the American Constitution, right up there within the civic holy trinity of Life, Liberty and Property. (Only Jefferson added that ‘Pursuit of Happiness’ business… the rest of the Founders were more pragmatic. Property can be measured. Happiness can’t.)

Ground rent holders also came in for the waxed moustache treatment, and certainly there are a bunch of sleazy ones. But there are also normal, good people who looked at ground rents as a secure method of funding their retirements, and several large charities in the Baltimore area who, through the largesse of their supporters over the years, have had the title to ground rents donated to them and collect quite a bit of money every year from them. Only a handful of the professional sleaze buckets decided this was a legal way to rob people of their homes, but they are the ones ruining it for everyone.

Personally, I wish they would abolish the entire system. Many of the earliest ground rents cannot be traced to a specific holder anymore, and so all they do is create another legal and financial situation that buyers and sellers have to confront at settlement. Mortgage lenders who are based outside of Maryland just don’t ‘get’ ground rent, and can screw up the transfer of a property by deciding at the last minute that they don’t like what they are getting into.

The Maryland Legislature, now back in session and just brimming with infinite wisdom, has decided that ground rent reform is a top priority. The SUN is smelling Pulitzer. And the rest of us, who deal with ground rents regularly, just hope they don’t screw it up any further than it already is. Anyone care to make a wager?

When it comes to a real estate transaction or working with an agent, some otherwise smart people make some pretty dumb assumptions.

Would you call five lawyers, and tell each of them that you will pay the first one that writes up an acceptable Will, based on the criteria you provide? Or, to move it to the other end of the trust spectrum, would you call up five car dealers and tell each one that you’ll buy your car from the first one that brings you a special order at your price with your list of features?

If you did, you probably wouldn’t hear from either the lawyers or the car dealers again.

I got a call from a successful area businessman today who basically asked me to do the same thing. Once it was clear none of my current listings suited his needs, he wanted me to keep an eye out for him. That was fine, until he declined coming to see me or hiring me as his buyer agent. Seems he has a friend who also is an agent, and he just couldn’t become a client of someone else. So, he basically thinks that I will work my butt off looking for properties that meet his criteria — with no promise of loyalty on his part to make sure that eventually I am compensated for my work. Its clear he also expects his friend to do that too… and who knows how many other listing agents he’s called and asked to do the same thing, once he discovers their listings also don’t meet his needs.

Does he think that he’s savvy and has five agents working their collective butts off for him?

In the end, real estate is about trust and loyalty between agent and buyer, or agent and seller. You might get a newbie, a raw hungry rookie, to do something like this once or twice until they had gotten tired of working for free, but no seasoned agent will bite on this kind of one-sided offer. We’ve all been burned by the potential buyer who won’t declare loyalty, work with you and reward your efforts.

So, think about this when you think its easy to get five agents to work for you at the same time. Fact is, they aren’t. If you want an agent to work their butt off for you, deal with them fairly and exclusively. Then you’ll find what you want.

The Wall Street Journal reported in yesterday’s edition (11.15.2006) that although real estate inventory in Baltimore increased by 2.1% last month, inventory in Washington DC actually decreased by 3.4%. If there is any statistic that predicts coming stabilization in the Baltimore market, its this one. Many of our new buyers have been coming from Washington, drawn by lower prices and relative ease of commute. If inventory there is starting to shrink, prices will hold, and once again buyers will look to Baltimore as the affordable alternative.

Coming as this does at a time when mortgage rates are holding or lowering slightly, this only makes the possibilities of a turnaround by springtime more likely.

Will the media report this in a positive way, or will they ignore it and go on predicting gloom and doom? Well, the Baltimore SUN has given no play to these stats at all in today’s edition.

I can think of only a couple of reasons why this might be overlooked. One would be that negative, ‘the sky is falling’ stories sell newspapers.

A second reason is a little more cynical, and more plausible. David Lereah, chief economist of the National Association of Realtors, has postulated that the real estate boom of the last few years robbed Wall Street of the investment cash they were looking for to resume the Bull Market of the ’90s. As real estate prices escalated over a period of years, people thought it was a safer bet to buy, renovate and re-sell real estate and so stock prices languished.

Now, as the media has been hyping the bad news stories about real estate, look at what has happened to the Dow. Despite the general feeling that the economy is sluggish, uneven, and not doing as well as the statistics suggest, the markets have been hitting new record after new record. And media companies are, for the most part, public stock companies who have benefitted from the run up in stock prices.

Could it be possible that the media is actively trying to keep the real estate market slow so that their shareholders benefit?