In answer to the question: "What's the best way to seal the flocking and railroad ballast to minimize it flaking off during use? Should I spray it with something like Dull Cote or some kind of spray adhesive? Or should I simply let "nature" take its course?"

Cheaper and just as effective as dullcote is Final Net hairspray. Don't laugh, this stuff is lacer based and works like a charm. Before doing that though you may want to give it a spray down with some glue and some drying time. I mix standard Elmer's (PVA) glue with water and a little window cleaner to break the glue's surface tension and spray it through an ordinary hand sprayer. I spray the terrain pretty heavily, let it dry and repeat a time or two more then apply the lacer to it to seal the works. Please make sure to let it dry though thoroughly to make sure you don't get moldy terrain.