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The Boom Is Done. . . . Now What?
By Christianna McCausland

Well, it was fun while it lasted. After year upon year of rising values and sales numbers, the great real estate boom of the early 21st century is now officially over. And not only is the boom over—in a lot of areas of the country and the region, it’s turning into a full scale bust.

But here in the greater Baltimore area, everything indicated we were set for a soft landing: After the roaring market began to taper off in the region, home sale prices ceased to skyrocket and a level of corrected normalcy seemed to return to the marketplace.

Everything seemed fine . . . until the end of the summer, when the subprime mortgage meltdown sent the already softening real estate market into a full-scale tumble.

After a slow but steady start to the year, home sales went into a tailspin as wary banks barred the doors, foreclosures crept up in markets hardest hit by subprime lending, and sellers were left to wonder how to set a realistic asking price in a market turned upside down.

And then, even as real estate was taking a downward turn, and Marylanders were reeling from the rising costs of power deregulation, as well as general price increases in necessities such as food and gas, the state levied new taxes. Many Marylanders seemed to be facing a grim 2008.

Yet the national naysayers aren’t lumping Baltimore in with the nation’s true real estate basket cases. If you’ve got a normal adjustable rate mortgage you can afford, and you didn’t get stuck buying too much house for your budget, things aren’t that bad. As real estate agents like to say, “All real estate is local.”

While you’re being inundated by catastrophic reports of falling home prices, foreclosures, and a lack of buyers in the national press; do a little homework and you’ll find that the numbers here at home don’t look quite so scary. According to the Maryland Association of Realtors, average home prices in the state actually rose 1.1 percent, from $355,574 to $359,375, with areas like Baltimore City seeing an increase of 5.3 percent and Baltimore County 2.5 percent; other metropolitan counties saw modest gains. (Rural counties such as Dorchester, Kent, and Somerset suffered declines). Unemployment in the state remains at about 3.8 percent—lower than the nation’s 5 percent.

Still, don’t think we escaped the storm entirely. “What’s happened in Baltimore has mirrored what’s happened in the country,” says Deborah Ford, director of the real estate and economic development program at the University of Baltimore. “Lenders woke up to the fact that they were making loans that weren’t risk appropriate and stopped making those loans, and the result is that the demand for housing has fallen—and the supply is still there.”

However, she notes that unlike states including California, Florida, and Arizona—where prices rose quickly and fell just as fast—Maryland was never so extreme in its boom time. And though the state could have done more, in Ford’s view, Smart Growth policies restricted some overbuilding in ex-urban areas, which have been the hardest hit across the country. Also, because Maryland, and the Baltimore metropolitan area specifically, never grew as white-hot as some of the markets that are now in serious crisis, Ford believes the area is well positioned to recover—that is, after a couple of years of price stagnation.

“I’m not sure stagnation is grim,” she continues. “Grim is when prices fall by huge amounts, either due to income problems, as in Michigan, or severe price run-ups as in California, Nevada, and Arizona. We didn’t have that here; we still thought we were cheap vis-à-vis Washington, and we were.”

No doubt our close proximity to Washington, D.C. and the state’s own solid and federally centered job base have helped bolster the Baltimore metro area. But the past 12 months have not been exactly rosy. Low-income buyers in areas like Prince George’s County and parts of Baltimore City, who were most affected by subprime lending, have helped drive up the state’s foreclosures. More people may lose their homes in tonier neighborhoods as high-end homes purchased by extremely leveraged buyers using interest-only loans come due. And there’s more bad news every day about the subprime crisis: It’s now becoming clear that many people given high-risk, high-interest loans should never have qualified for any kind of loan.

Local home sales were stymied by the retreat of banks and mortgage companies from their liberal lending policies, but even with lowered interest rates, and loans available for those with good credit, a lot of inventory is still not moving. This may be due to buyers who are sitting on the fence waiting for lower prices, which causes more homes to sit and the market to soften, creating an unfortunate equilibrium.

Economist Anirban Basu, chairman and CEO of the Sage Policy Group explains that the role of consumer attitude cannot be underrated.

“The general mood of the consumer doesn’t help because the consumer is grumpy,” says Basu. “The consumer isn’t just looking at their property taxes, but rising gas prices, rising food prices, rising tuition prices, rising healthcare costs, rising electricity costs, rising cable bills—and they are not happy. People need to feel some level of comfort to make a big ticket purchase, like a home. All this conspires to further weaken the housing market in 2008.”

Basu believes that, by mid-year, we’ll be in the fourth year of a period of real estate correction, and anticipates that average home sale prices in ’08 will drop perhaps 5 to 10 percent. And that could be a good thing, especially if the Federal Reserve continues to drop interest rates, making it easier for buyers to get in the home buying game. “That [drop] shouldn’t produce panic. In fact, it should produce a lightbulb over our heads that this is the time to buy,” says Basu. “With falling prices comes a re-engagement of the would-be buyer. That’s what the market has needed—for the buyer to step back in and say, ‘This is a good time for me to buy.’”

According to Basu, the buyers who could fuel a recovery are the first-time homebuyers: young, Generation Y buyers who are coming of age, preparing for marriage and family, and who don’t need to off-load one home in a soft market to get another. He also believes that second home markets like Ocean City could rebound more quickly because buying a vacation home doesn’t depend on selling one’s first home: it’s an indulgence buy. The move-up buyers (those who need to sell one home to get to the next) are the ones who will feel the sting of the market’s crawling pace.

In any conversation about recovery, be it in real estate or the economy as a whole, optimists like to focus on BRAC, the Base Realignment and Closure process that is bringing an estimated 28,000 households to the areas around Aberdeen Proving Ground and Fort Meade.

Although those folks are starting to trickle in, the torrent of people and jobs (an estimated two jobs will be created for every one military job) will not be felt until 2010 or 2011, according to Lt. Governor Anthony Brown, who heads the governor’s BRAC subcabinet.

“I hope that the recovery happens sooner rather than later,” says Brown, “and given the timeline I outlined, we’re looking at probably two years from now for the bubble, if you will, to arrive here in Maryland. I don’t want to tie BRAC to the real estate recovery—all I will say is that the BRAC arrival of households is going to have a positive effect on the real estate market.”

Those, ladies and gentlemen, are the carefully chosen words of a politician who doesn’t want to paint too rosy a picture.
Although the Baltimore region is well placed to recover from the real estate slowdown (some say by 2009, others speculate 2010), there are some economic factors that could change the course of the ballgame.

Foremost are recent taxes enacted by the state legislature that could suppress new job growth in the state (and thus subsequent real estate sales). If that happens, according to Ilene Kessler, immediate past president of the Maryland Association of Realtors, trouble could be brewing. Local jurisdictions would see shortfalls in payroll and transfer taxes; to try and build up their coffers, they could decide to increase real estate taxes. “Sometimes jurisdictions make real estate the ATM of the local economy,” she says. “If local jurisdictions increase real estate taxes, they will take something that’s in recovery and absolutely slam it into the ground.”

The slippery part of the real estate equation remains the nation’s overall economy. If the country slips into recession, it’s anyone’s guess where the market could go. If there’s a silver lining to be had in this cloud that’s settled over the region (and the country), it’s that people still need a place to live, even if the heyday of 2005 is long gone. Anecdotal evidence from real estate agents indicates that appropriately priced homes in good shape are not only selling, they’re even receiving multiple contract offers.

“I expect that people will still be coming in and buying,” says Kessler, looking ahead to the spring of 2008. “Sellers understand that the market has adjusted, and they will be more realistic in how they price their homes, and we will probably have a more vigorous market.”

“Probably” is a word you’ll hear a lot in the coming months from those involved in the real estate business. Given the array of factors at work in determining the direction the market will go, no one is sure what the rest of 2008 holds in store.

The Real Estate Report

Baltimore City
After a difficult autumn, Baltimore City real estate was showing some signs of stability in early 2008 as the dust settled on the credit crisis and the Federal Reserve dropped rates. And despite the gloom and doom in most of the nation, average home-sale prices in the city were up in 2007. While no one is putting rose-colored glasses on a challenged market, there are worse places to be than Baltimore.

“Baltimore City is still the most affordable jurisdiction in the Greater Baltimore region,” says Anna Custer, Executive Director of Live Baltimore Home Center, a quasi-public agency that touts the benefits of living in Charm City. “We are the choice for first-time homebuyers, we are the choice for young professionals, we are the choice for people who maybe were priced out of other markets.”

The city is also close to hyper-expensive D.C.: Since 2002, Live Baltimore has been aggressively courting Washingtonians with the lure of reasonably priced housing and a good quality of life.

Baltimore would also like to get its slice of the estimated 28,000 Base Realignment and Closure (BRAC) households who will be coming to the region (in fact, Live Baltimore is already trying to appeal to this market), but whether that will play out will probably not be seen until 2010.

Historically, Baltimore has never been a condo kind of town, but luxury complexes and townhomes have sprung up all over the city, appealing mostly to baby boomers who are sick of fixing the roof or mowing the grass at a suburban home. These waterfront homes don’t come cheap, but luxury buyers tend to be insulated from real estate’s ups and downs.

According to Theo Harris, a Realtor with Keller Williams Realty who lives and works in Baltimore City, there is definitely more inventory on the city market than there was a year ago and homes are sitting, on average, for about 105 days. “There’s some really good affordable deals to be had, where two years ago they just weren’t available—you had to pay double and triple the price,” he explains. “Having been in the business 15 years, I’ve seen the cycle a couple of times, and I can tell you with certainty this isn’t a down market; this is what a normal market is.”

Harris speculates that the boom years spoiled everyone. In 2005, any halfway liveable place could go on the market, get multiple above-asking price offers from people with all kinds of mortgage options, and sell fast. Now, “sellers are getting beat up and buyers are feeling pretty good,” says Harris.

“Unfortunately, the market is never fair—it’s always one way or the other. Right now is the buyer’s time.” -CM

Baltimore County
Last year (but prior to the subprime market crisis), real estate in Baltimore County was relatively strong, though sales had begun to slow at the end of 2006. But after the subprime meltdown in August, the bottom fell out of the market. Following an abysmal autumn, there was a slight rebound in the last two weeks of December, followed by a busy first quarter of 2008. Reasonable homes are moving, but not luxury properties, according to Marc Witman, a partner in Yerman, Witman, Gaines & Garceau Realty, who has been selling real estate since 1989.

“In our office, for example, we have 30 transactions on the board right now—that’s really strong, and a lot of deals,” says Witman, speaking from his office in Mt. Washington. “But I think three are over a half million dollars. The rest are under a half million dollars. What we’re seeing in the market now is a great deal of strength, including some multiple offers, on properties under a half million dollars.”

To Witman, this is grounds for optimism, because the market must move from the bottom up: The $500,000 single-family home can only be purchased when the owners of the $250,000 townhome can sell their home. Baltimore County also has a strong employment base and a large number of homebuyers who live in the county and commute to the city for work, so it offers a good foundation for homebuyers.

Still, there are many potential buyers loitering on the outskirts of the market waiting for prices to drop further, and many stubborn sellers who aren’t ready to reduce prices. Although lower interest rates may push some potential buyers off the fence, Witman believes the gap between buyer and seller expectations needs to be closed.

“While transactions are off about 30 percent, prices are relatively flat,” he explains. “That’s a problem. The only way to fix that problem is prices need to come down, and we haven’t seen that yet. Until we really see a reduction in the pricing, I don’t think that 30 percent gap will close.”

A lot of those homes that are sitting in inventory are being passed over because they are poor quality, too. In a fast market, people will buy anything. In today’s market, homes must shine in order to entice discriminating buyers. “I think there are a lot of enthusiastic buyers who haven’t found the right property, and a lot of frustrated sellers who just can’t get their arms around the fact that the house isn’t worth what it was last year,” says Witman. He has seen certain homes in the same neighborhood sit on the market for months, while the house next door sold relatively quickly because it was in better condition .-CM

Anne Arundel County
In an industry where location is king, Anne Arundel County has few regal peers. It’s close to Washington, D.C. and Baltimore, it has plentiful, beautiful waterfront communities, it has high-density business districts, and even the State Capitol. And that’s before you add in Fort Meade, which will soon benefit from the federal military Base Realignment and Closure (BRAC).

Perhaps that is why cities such as Annapolis are still having an affordability crisis when the rest of the country’s prices are in freefall. Bargains are few and far between, but they do exist: Northern parts of the county, such as Pasadena, and the south, like Deale, are less expensive than their centrally located neighbors.

Despite a difficult 2007, lower priced homes (those below $500,000) are on the move in Anne Arundel County, according to Dave Wright, an associate broker with Coldwell Banker Residential Brokerage in Annapolis. Sales of homes valued in the $500,000 to $1.5 million market have been fewer, while the high-end market of multi-million dollar home buyers has proven relatively immune to market fluctuations.

Like other counties, Anne Arundel has a lot of inventory on the market. “The customers we’re dealing with aren’t convinced we’ve hit bottom,” says Wright. “But you’ll never know you’ve hit bottom until you start to ascend the other side. If people wait too long, they might miss a good buying opportunity.” Wright thinks that Maryland real estate is still pretty strong.

“If people have confidence, they will return to the market. I think there is pent-up demand here, and I think it’s a confidence issue right now.” -CM

Carroll County
Carroll County has transformed itself from a largely rural, agricultural area into the quintessential bedroom community. Most residents are commuters who wend their way to major roads like Route 70 and 795 to get to federal employers such as the Social Security Administration and Fort Meade. As the county already has many residents working at Fort Meade, they hope more will come to the area as a result of BRAC.

According to Jim Blaney of Realty World-Unlimited in Eldersburg, sales of lower-priced housing (townhomes, condos, and inexpensive single family homes) have been brisk going into ’08 as first time buyers seize upon low interest rates and the chance to get in on a buyer’s market.

“I think it is going to rebound,” says Blaney. “I don’t think it is going to bounce, I don’t think it is going to go crazy. But I think the slide in values we’ve seen because of supply and demand issues will come more in balance, and that’s going to give more folks confidence to purchase in the market.”

Carroll County is flush with housing choices. It has new suburbs, old neighborhoods, and lots of countryside. Unlike many counties, it still has buildable lots as well. Not surprisingly, the southern, commutable sections of the county are priced higher than the rural areas north of Westminster such as Taneytown and Hampstead.

“Carroll County has done well through past storms, if you will, because of its location,” says Blaney, who has spent 25 years working in the area. “I guess I’m biased, but it’s a nice place to come home to, no matter where you work.” -CM

Harford County
“This is the land of pleasant living,” says Julie Duley, a long-time native of Harford County and president of the Harford County Association of Realtors. Duley describes Harford County today as being like Baltimore County 30 years ago: a little bit country, but close to downtown amenities and jobs.

A major building boom, coupled with the double digit appreciations of 2004-2005, have come together to create a dearth of affordable housing in the area. Unlike some counties that have seen swift movement in properties under $300,000, Harford County doesn’t have a large stock of affordable homes. There are more active listings in the $300,000 to $400,000 range and above, something the real estate industry and the county are trying to remedy, but there are few easy answers.

According to Duley, this is still a good time to buy, not only for owner-occupiers. BRAC transplants to Aberdeen have started to trickle in slowly and not every family or individual will buy a home; many will rent. That’s good for investors who want to buy a property at today’s low interest rates and capitalize on the rental population moving to the area.

“With interests rates where they are and the inventory one has to select from, I think people are foolish not to be buying,” says Duley. “If interest rates creep up at the end of ’08, [at the] beginning of ’09, people will say ‘I should have bought back then.’” -CM

Howard County
While many surrounding counties are starting to feel the effects of the weak market, Howard County seems recession-proof. We guess that’s what makes the area so appealing: county residents are always talking about how content they are with their well-valued homes, nice schools, and their fancy mall. Despite some price adjustments, home values remain consistently high, averaging $450,774 in 2007 (a slight increase over ’06). While there is inventory to be had, the market for home sales remains vigorous, according to Ilene Kessler, who has worked in the market for 23 years.

“It’s a more consistent market due to economics,” she explains. Howard County has long benefited from its commutable distance to both Washington, D.C. and Baltimore. It also has Columbia at its center, which contains more than 5,500 businesses and about 100,000 residents (half of whom are employed in Columbia, and earn an annual average of close to $100,000). The area is one of the most racially diverse in the region, which is a draw for many residents.

“With Howard County, there is a great quality of life,” says Kessler. “It really is unlike any place I’ve ever been. There’s a wonderful spirit in Columbia.” Still, despite its utopian appearance, even Howard County could feel the squeeze of new taxes, and perhaps some foreclosures among overly leveraged high-end buyers. But it will continue to attract educated, wealthy buyers.

And then there are the rumors that the Columbia Town Center may be revitalized; if that happens (and it’s a big “if,” according to Kessler) the area could see prices go even higher. -CM

York County, PA
For the past decade or so, southern Pennsylvania has taken on a decidedly Maryland-like accent, as its inexpensive homes and plentiful land attracted many buyers who were priced out of Maryland. Stephen Snell, executive officer for the Realtors Association of York & Adams Counties, explains that prices above the Mason-Dixon line for an average one-family home have reliably been about $100,000 less than in Maryland. That savings justified the long commute to Baltimore-area jobs for many would-be homeowners, and the region blossomed with new construction.

Now, rising gas prices and stagnating home prices in Maryland have cooled off the southern Pennsylvania market. Coming into the close of 2007, at least two areas in York County close to the Maryland state line (including the southern districts of Shrewsbury, New Freedom, Glen Rock, and the southeast districts of Stewartstown, Fawn Grove, and Delta) saw average home sale prices decrease by 4 and 5 percent over the same period as compared to 2006. Snell, however, remains optimistic that the area will rebound when BRAC folks heading to Aberdeen Proving Grounds in Harford County find more affordable housing in southeastern York County. -CM