Martin Luther's Sacramentology

Fascinating question. I would be careful to connect modern Lutheranism with what Martin Luther believed. Martin Luther developed over time. Also, I view this question as Luther's sacramentology, not soteriology. Section 29] of the Larger Catechism seems to well-distinguish between the Water of Baptism being a seal of the promise of God unto salvation, but is not salvation itself. Never believe that Lutherans or Martin Luther believe in a form of Baptismal Regeneration.

Where as Roman Catholic doctrine sees sacraments as a means of communicating grace the modern Lutheran view sees them more as symbols of the promise of God. See section 35] of the Confession that talks about Baptism being God's work, not ours. It speaks of Baptism of Christ being necessary for faith, and it is the faith that accesses salvation. The sacrament of baptism is distinguished from Christ's Baptism.

It is interesting that Luther viewed Sacraments as a part of God's Word. It's a very different view than the Reformed view which sees Sacraments as Signs and Seals only. Not without power, but certainly not as powerful as Lutheran's appear to view them. Sad-to-say, I am far from an expert in this. :)

I highly commend to you the Beggars All blog. Jim Swan, who runs it, has impressed me with his study of Luther. I doubt I've done a great job of representing the sacraments here, but the links should be useful.

I had the same thoughts you did until I understood Luther more.  The thing with Luther is that he most certainly believed you are saved by faith only and that even baptism was not necessary. Having said that he puts such weight on Baptism that it almost seems that 'if there was anything needed beyond faith' baptism would be it.  You must not blame Luther for his fear of breaking away from Baptism.  

His idea was Different then yours and mine. He thought there was a lot of power in Baptism so that many children could have faith when they were baptized.  It was not about saying faith was not enough, it was about not wanting to take that away from children. For example, Luther said:

If baptism is not right, that is, without value or help to the children, then I would be guilty of no greater sin than the Word of God had been spoken and his sign given in vain. I would not be responsible for the loss of any soul, but only of an ineffectual use of the Word and sign of God.

But this God would easily forgive me, since it was done in ignorance and more than that out of fear. I did not invent it. It came to me by tradition and I was persuaded by no word of Scripture that it was wrong. I would have been unwilling to do it, had I been convinced otherwise. It would be very much as when I preach the Word, also according to his command, among the unbelieving and without fruit, or as it is said, cast pearls before swine, or holy things to the dogs [Matt. 7:6]. What could I do? Here, too, I would rather sin in preaching fruitlessly than in refusing to preach at all. (Luther's Works Volume 40, P254). 

So you see Luther was uneasy to entertain a break from the Catholic church on this point.  The second main idea with Luther, is that he saw Baptism as something that could be like a woman marrying someone they do not love.  A woman may get married without love, but then after falling in love their is no need to remarry. This is because the marriage rite was performed properly.

But a baptism on the Word and command of God even when faith is not present is still a correct and certain baptism if it takes place as God commanded. Granted, it is not of benefit to the baptized one who is without faith, because of his lack of faith, but the baptism is not thereby incorrect, uncertain, or of no meaning. (Luther's Works Volume 40, P253)

Now just to be clear this is the real Luther we all know and love:

This is what we think. When the Holy Spirit makes us aware of the work of Christ and of his merit, outwardly through the gospel and inwardly through his gift, when he bestows this merit upon us and causes us to believe in it, then this faith is nothing else than a living trust and confidence in the merit that Christ has bestowed upon us. We rely upon it from the bottom of our hearts, without doing any works of our own. We are confident that it is not our own works but the work and merit of Christ that destroys our sins, overcomes death, and swallows up hell. This means that no work is required in order to believe in God or to have a true and living faith. (Luther's Works Volume 36, P301-302)

On the subject of believers who die before being baptized, Luther, even with his high view of baptism says:

If a person can’t have access to the sacrament (baptism), faith is enough, according to that word, ‘Your faith has made you well’ [Matt. 9:22]. On the other hand, if he can have it, he should not despise it. (Luther's Works Volume 54, P459)

So in summary, Luther never thought of it as adding something to works.  In fact he accused Anabaptists as making baptism a work, for not trusting that faith coming after baptism was good enough.

This is really the key to setting this subject right.  The Anabaptists and Lutherans were actually the same in many ways , they just did not realize it yet, among those violent changing times. As far as the Anabaptists and Luther go in history, they had more in common then history might make it appear.