Investors heat up housing market

City trend could hurt home values in future

July 03, 2005|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN STAFF

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.

Investor purchases turned up in 2002 and have accelerated ever since, painting a picture of increasing frenzy. In 2001, about one out of three arms-length home sales were to "non owner-occupiers," according to data from the state Department of Assessments and Taxation, analyzed by The Sun. Two years later, they accounted for half the sales, and in the first four months of this year, 67 percent. Early statistics for the following weeks show the trend strengthening.

Such buyers are either investors or people purchasing a second home, but local real estate professionals say it's overwhelmingly the former in Baltimore. Many are coming from out of town, drawn here by costs much lower than in pricier cities. And there are indications that investors are increasingly moving into marginal neighborhoods to snag bargains.

In stark contrast to Baltimore, the rest of the state has hovered around 20 percent since 2000. Surveys also show a much lower share of investor activity nationwide than in the city.

"It is hard to imagine any other explanation except that people are speculating with the idea that these places are going to go up in price," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, who believes that large chunks of the nation are caught up in unsustainable housing bubbles.

"The problem of course is that when it comes to an end, the higher you go, the sharper the reversal," he said of Baltimore. "You might see a very depressed real estate market."

But for a city long used to disinvestment and loss of population, the sudden surge strikes many as good news.

Neighborhoods are troubled by 16,000 abandoned houses and thousands more in poor condition. Local officials and real estate professionals say many of the investors are refurbishing decrepit rowhouses before renting or selling them.

"There are a lot of people dying to get into Baltimore and do their own little renovation," said Lauren Montillo, a longtime local investor who is rehabbing houses for an investment management firm and "wholesaling" vacant properties to other rehabbers. "There's never been such a large demand."

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.

The result: The city saw more sales to non owner-occupiers in the first third of this year than in all of 2000 - nearly 3,900.

`A gold mine'

In a market with more demand than supply, "it's almost inevitable," said Joseph T. "Jody" Landers III, executive vice president of the Greater Baltimore Board of Realtors and a former city councilman. "What does the city have? Inventory. ... It's almost like a gold mine ... because nobody else has excess inventory."

Housing Commissioner Paul T. Graziano sees the investor interest as a largely positive force that will build on itself as more areas of the city improve. Homeowners can get loans to fix up property in neighborhoods that a few years ago were shunned by banks because values were too low to justify the repairs, he said.

"The city's rebuilding, and you see that in the amount of new investment coming here," said Mayor Martin O'Malley.

Investors are also moving farther and farther from the hot waterfront into cheaper transitional neighborhoods, city officials and real estate professionals said. One sign of that: Non owner-occupiers paid an average of $94,000 for a property in the first four months of this year, $9,000 less than the same period last year, according to the state transfer data. (Traditional home buyers paid nearly $152,000 on average, an increase of about $13,500.)

Owings Mills-based K Bank, which started a division last year to handle demand for renovation loans, expects to finance more than 300 rehabs this year, many outside solidly established neighborhoods. Laura Randall, vice president of the division, said nearly all the investors she deals with are immediately selling the fixed-up properties to owner-occupiers.

"It's been great for the entire city," Randall said.

Graziano, who sees the same trend, said that's why he's not worried that the high number of investor purchases is a sign of a bubble.

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