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

Ever since the groundhog predicted an early spring, most of us have been eagerly waiting for the little guy to be proven right.  And while the weather makes it a day-to-day affair to know if winter is truly over, from the real estate data coming out lately it seems that spring truly has arrived early.

February 2011 statistics show that in the Baltimore region, home sales were up 7% over February of 2010.  Down in the Washington metro area, which includes nearby Montgomery and Prince George’s Counties, pending home sales in February increased a whopping 33% over the same month a year earlier. The median home price in February 2011 in the DC region was $300,000, down from $309,000 the year before — but Baltimore’s median home price in February 2011 was $205,350, down from February 2010′s by 9.54%.  So, Baltimore metro still remains a much more affordable alternative for Washington-area homebuyers, even with price declines, and a lot of the activity here has come from DC residents looking for less expensive housing, a trend we expect to continue.

All of this is good news, unless you happen to be selling a home right now. From a seller’s perspective, the overriding issue is the number of distressed properties currently flooding the market and driving prices down. Most buyers enter the market eager to snap up a bargain, but not fully informed as to exactly what it means to them to buy a distressed property, or the differences between the types of distressed property currently on the market. So here’s a brief overview to get you up to speed.

The largest category of distressed properties include homes listed for sale that are “under water” — where the owner owes more than the house could currently sell for in the market.

Short sales are where a seller, who is under water, also doesn’t have the money to make up the difference and has to ask the lender to forgive the amount of the shortfall. Short sales get their name from this seller’s shortfall, not from the amount of time they take to settle — which is anything BUT short. Generally, the seller is still in the home and has listed the house as a short sale in consultation with their bank or institutional lender. The mortgage is still in place, as are all the investors who bought into that mortgage once it went to the private equity market. Sometimes there is a second mortgage, and yet another set of investors. Before a property can reach the settlement table and transfer to a new owner, the current seller has to negotiate a contract with a qualified buyer and then start to make the case to the lender(s) that he/she will require financial assistance to sell the property. If the lender(s) accept the fact that the seller is truly in distress, they then have to go to their investors and get them to agree to take the loss. All of this has to take place before the lender can notify the buyer if the contract offer will be acceptable — even if the contract has been signed by the seller.

This process is long and tedious. Buyers and their agents can only wait on the sidelines while the lender(s) and investors  go back and forth with the current owner to satisfy all the paperwork requirements. In today’s market it is not unusual for a short sale to take more than three months to settle, nor is it uncommon for a buyer to wait three months to discover that their offer will not be accepted by the lender at all. Most first-time buyers, who are dealing with a landlord who needs a specific date upon which his rental apartment will be vacant, cannot consider short sales as a viable option.

Foreclosures are where the lender has evicted the previous owner, passed the loss along to the investors who are now out of the picture, and has taken ownership of the property. Foreclosures are usually listed for less than market price, which is why they tend to drive down property values in the area.

Foreclosures present a completely different set of challenges from the buyer’s perspective. With the previous owner and the investors gone, the chain of authority for decision making is much clearer, but the bureaucratic nature of most lenders removes much of the give and take you’d find in a real negotiation. Listing prices are usually set with a businesslike efficiency, and routinely reduced on a four to six week schedule if no qualified buyer has surfaced. In between reductions, there is usually little flexibility on price. Many buyers think the bank will be desperate to negotiate and get rid of the property, only to have their opening low offer rejected in short order because it is too far below the current listing price.

A majority of foreclosures also need some level of renovation before they can be occupied. While this can be a great way to get a newly renovated house at a good price, many first time buyers are not ready to handle the purchase experience and then jump immediately into working with a contractor to complete a four to six week renovation.

If you’re a buyer in this market, do your homework, and you can truly use the current distress to your advantage and end up with equity in your new home from day one. But be realistic about your goals and your abilities, and if you don’t think your life will allow you to deal with the uncertainties of a short sale or the responsibilities of a renovation, stick to conventional non-distressed listings with individual sellers where the timeframe and the purchasing process is much more predictable.

For several years, the answer for many first time buyers was “rent.” That may be changing.

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For the last few years, there’s been a real decision for consumers, especially younger consumers who might never have owned a home before, as to whether it made economic sense to buy a home. Home prices have generally fallen all over the country since 2006 or 2007, depending on your region, and many buyers decided that the possibility of buying a house as it was losing value was too scary from their perspective. Some consumers who were homeowners and had to move for their job sold their home and rented in their new city.

The Rent vs. Buy contest is now beginning to tilt back toward the Buy side in many areas. Trulia, the well-known real estate website, publishes a Rent vs. Buy Index every three months. On that list, they rank the fifty largest metro areas in the country, based on a ratio comparing the costs of home ownership with the average cost to rent. In their First Quarter 2011 Index, thirty-six of the fifty regions qualified for the “Much Less Expensive to Buy than to Rent” classification, including Baltimore (#11) and Washington (#13).

Renting a home in this region has gotten comparatively more expensive in the last few years as vacancy rates have declined and landlords have enjoyed stiff competition for their properties. But there are also several reasons why now may be the best time in many years to consider purchasing a home.

1. Prices in the greater Baltimore-Washington region have begun to stabilize. Especially on the Washington DC end of the region, as prices in the District have actually increased 8% in the last two years. One of the biggest advantages Baltimore had in the last decade was its affordability when compared to Washington. If prices have begun to rise in DC, Baltimore will once again start to look like the bargain it still is (even with much publicized commuter rail problems between the two cities).

2. Interest rates have started to rise, and are about .5% higher than at their low point last fall. We’ve been hearing about how interest rates have tumbled to low points not seen in fifty years, and while they continued to fall or held steady, there was no motivation to buy. In fact, many buyers watched falling home prices and decided to wait, no matter what the interest rates were doing. But now, with prices starting to stabilize and interest rates actually rising again, we may be at the most affordable point in the cycle.

3. Interest rates are predicted to be yet another 1% higher by the end of 2011. For an idea of what that might mean to a potential buyer, I used one of my own current listings and calculated the principal and interest payment that would be available today to a qualified buyer, and then did the same calculation adding 1% to the interest rate. With everything else staying the same, the mortgage payment went up by about 5%. On a $1,500 a month payment at today’s rate, that means the buyer will pay another $900 every year just on principal and interest on their loan.

To me, that says it may be time to get off the rent bandwagon and start looking to cash in on the bargains that the housing crisis has created.

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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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.

If you’ve noticed that the rental market seems to be tightening, you’re right on the money.

In a survey taken by the National Multi Housing Council (as reported in The Real Estate Professional, a trade magazine), the owners of the nation’s largest apartment buildings are confirming that occupancy rates remain high and that the number of tenants moving out to become homeowners is very low. More than 80% reported a significant decrease in the number of renters leaving to purchase their own home.

But the number of tenants moving from investor-owned properties into larger professionally managed buildings has increased, most likely because of rising foreclosure rates on investor-owned buildings.

Obviously, for the housing market, this isn’t good news. New homeowners coming into the market are the ones that allow current homeowners to sell and move up, setting off the domino chain reaction into bigger and more expensive houses. Government policy makers who are looking for ways to shore up housing need to take a look at this statistic and work on encouraging the renters to take the leap.