From Boston to Baltimore

If you live in Baltimore, Maryland and are considering purchasing real estate in that area, and if you happened to catch last Thursday's ABCNews Nightline about the real estate boom, how might that influence your real estate purchase decision making process?

The Nightline piece began:

Tonight on Nightline, the red-hot real estate market goes worldwide. From Baltimore to the Balkans, it seems everyone is playing, but not everyone is winning. Is it a bubble that's beginning to leak?

This may have come as a shock to people living in Baltimore - maybe the first time that "Baltimore" and "bubble" were heard in the same sentence.

There were a total of four segments in all. First the New Hampshire real estate market, then another excellent animation about mortgage lending by Robert Krulwich, a look at how the British are buying Bulgarian real estate, and finally this segment about the Baltimore real estate market:

Chris Bury: We once thought of buying a home as a long-term investment. Now many see it as a short-term gold mine. But can this housing craze lead to real economic revival in some of our toughest neighborhoods? We found an example very close to here, less than forty miles up the road, in Baltimore, Maryland.

[Voice of auctioneer]

Chris Bury: In Baltimore, the bidding at real estate auctions has been this fast and furious for nearly a year. On this day, auctioneer Paul Cooper sells 25 properties in less than three hours. Prices from $50,000 to $450,000. Many of the buyers come from out of town. They're smelling bargains and sensing a revival in the city on the rebound.

Bostoner #1: I'm from Boston and I came to Baltimore because I heard so much about the properties.

Bostoner #2: I went there looking for another investment property, and we found it. We ended up paying below our expectations.

Auctioneer: A lot of the out-of-towners have an insatiable appetite. They're just coming down here, they're buying, they're doing renovations ...

That's right, Baltimore is a new real estate hot spot. New Englanders are coming south to help revitalize neighborhoods in Baltimore - investing in the future of a once great city that has had some hard times lately. The city officials see the goodness in all of this - homes in blighted areas being passed into the hands of American investors only to be repaired and restored to improve the neighborhood. The segment concludes:

Chris Bury: For now city officials and investors alike seem unafraid that the Baltimore market, like so many others could be a bubble waiting to burst.

Investor #1: I don't see a bubble. I see prices continuing to climb at a steady rate.

Investor #2: I would say it's a bubble in cities like San Francisco, L.A., New York. I think Baltimore is a little bit of a forgotten gem.

So, You're Living in Baltimore

So, you're living in Baltimore and thinking about buying real estate in Baltimore. It sounds like a safe thing to do based on this piece - the auctioneer is happy, the mayor is happy, the Boston investors are happy. There's been lots of talk about housing bubbles - in places like California and New York, but this is Baltimore.

Does the local paper have anything to say about the recent popularity of the Baltimore real estate market? Well, as a matter of fact, this Baltimore Sun article provides an in depth look at the many pros and cons associated with the issue. It breaks down as roughly two parts caution and one part cautious optimism and includes these notes:

Two out of three houses sold in Baltimore this year have been snapped up by people who don't intend to live in them, an unusually high amount of investor activity that is adding fuel to the city's efforts to revive itself - but could endanger housing values down the road.

There have also never been so many out-of-town investors, Baltimoreans say. Buyers from high-price areas such as Washington, New York and California are plunking down their dollars here because prices are appreciating quickly but are still comparatively cheap. Many area residents are jumping into the fray, too.

And some are selling to each other - dozens of houses have turned over more than once this year, generally from investor to investor.

It looks like the real estate bubble might be coming to Baltimore, but it's not there yet. So, if you live in Baltimore, and were considering a home purchase, what do you do?

Look North

Maybe it would be wise to check out some real estate stories in the newspapers where the out-of-town investors are coming from - just to get a better understanding of the big picture. Let's see, in New Hampshire, the experts are no longer questioning the existence of a bubble, but rather trying to predict it's timing and impact:

New Hampshire's red-hot real estate market is expected to enter a painful price-correction period starting in late 2006 that economists say will result in a 5 percent to 25 percent drop in home prices.

Many economists believe house prices will continue to rise until then. But, New Hampshire economist Russell Thibeault of Applied Economic Research in Laconia said most recent home sales figures for New Hampshire over the past five months indicate prices have stopped increasing. Prices have leveled off, he said.

Same thing in Boston:

Experts say the first signs of a bursting housing bubble include falling sales volume, but prices that don't immediately drop - exactly what the latest Massachusetts real estate figures show.

The Massachusetts Association of Realtors reported yesterday that single-family house sales fell 11.1 percent in May - the worst decline in almost three years. But median house-sale prices actually rose 6.2 percent, hitting $359,900.

Look Around You

So, what does all this mean to Baltimoreans and why are Bostoners investing here?

According to National Association of Realtors, the year-over-year increase in home prices, as of the end of the first quarter of 2005, was 14.8% in Boston but only 6.9% in Baltimore. The Boston area has experienced year-over-year increases of over 20% for the last several years and has been designated a bubble area by everyone except the local realtors - everyone pretty much accepts that the boom is over.

This helps to explain why the guys from Boston are investing in Baltimore real estate and not Boston real estate. In Boston, real estate prices are now very high and there is little hope of additional significant appreciation.

Is that a good thing? Investors leaving mature bubbles in their home states to invest in other parts of the country? If the Boston to Baltimore connection is anything like the California to Arizona connection or the California to Nevada connection, prices in Baltimore are going up!

Just think of the potential gains between now and the time that Baltimore is called a bubble. Just think of what might come after that.

So what does it all mean if you live in Baltimore?

If your business is real estate speculation, it sounds like now is the time to act. There may be another year or so of price increases before they start talking about a bubble bursting in Baltimore - just think how far prices could rise!

If, on the other hand, you are looking for a place to call home for the next ten years or so, you should realize that you are competing with wild-eyed speculators who are most likely going to drive up prices in your area, then move on to some other area as soon as prices moderate in Baltimore.

If you are buying for the long term, you may feel good about your purchase a year from now - you may think of yourself as having made a shrewd investment decision as your home equity rises. But, how about in two years or five years - will there be any speculators around to support price levels then?

Will real estate stories in the Baltimore newspapers next year sound like the real estate stories in the New England newspapers today?