Paging Chico Marx

Dolors & Sense

by Sanford Rose

KISSIMMEE Florida—(Weekly Hubris)—4/4/11—Remember Chico in the Marx Brothers’ classic film, “The Cocoanuts”? He’s the guy who was supposed to bid up the price of property in a rigged auction. Only he couldn’t stop raising his own bid, even when the “pigeons” dropped out.

We need Chico now.

Chico, Groucho or Karl?
Chico, Groucho or Karl?

Houses are being sold for the proverbial song, especially in markets where banks own a lot of foreclosed real estate. (Years ago, those houses were carried on bank balance sheets as “Other Real Estate Owned,” or OREOs. Today, the “O” has been dropped, which is just as well, for cookies they are not.)

In many markets, the banks are selling their REOs at far less than the replacement cost of the structures. Obviously, in these areas the market has more than corrected for the real estate excrescences of five years ago. Bloat has become penury.

At a national level, the ratio of house prices to fair-value rentals has now fallen to its multi-decade average. Or even below.

Put differently, when you buy a house today, you pay about, or slightly less than, what you’d expect to pay in rents in the future had you elected to remain a renter.

Home ownership is becoming a bargain, but there are few bargain hunters. That’s basically because people now understand that homes are much riskier investments than they were a few years ago.

That’s why we need Chico—a man who was not risk averse.

But Chico needs plenty of help: real people bidding up prices so he doesn’t have to do the job himself.

We could bring back the home buyer refundable tax credit. Such a measure is normally labeled “bad economics” by most observers, including professional economists.

They’re right. It is bad.

But it’s bad in the sense that Winston Churchill called representative democracy bad. (In fact, he said it was the worst of all political systems, except for all the others.)

Worse than distorting the tax system is doing virtually nothing about the Great Glissade, the apparently inexorable continued decline in house values. That decline, coupled with the oil price rise, has begun once again seriously to erode consumer confidence.

Worse is allowing the lower middle class, whose wealth, such as it is, is tied up in their houses, to suffer further losses, while the middle class and the affluent sectors rebuild their wealth from stock-market gains.

Worse is ignoring the continued hollowing out of our major cities, as defaults and foreclosure signs creep from poor neighborhoods to those less poor and, eventually, to those once thought desirable.

Worse is countenancing a trend that is producing a society more bifurcated than it has been since the Gilded Age—a society riven with bitter jealousies that could easily erupt into civil unrest and even something close to class warfare.

If we don’t get more people like Chico Marx, we could get a lot more like Karl Marx.

Sanford Rose, of New Jersey and Florida, served as Associate Editor of Fortune Magazine from 1968 till 1972; Vice President of Chase Manhattan Bank in 1972; Senior Editor of Fortune between 1972 and 1979; and Associate Editor, Financial Editor and Senior Columnist of American Banker newspaper between 1979 and 1991. From 1991 till 2001, Rose worked as a consultant in the banking industry and a professional ghost writer in the field of finance. He has also taught as an adjunct professor of banking at Columbia University and an adjunct instructor of economics at New York University. He states that he left gainful employment in 2001 to concentrate on gain-less investing. (A lifelong photo-phobe, Rose also claims that the head shot accompanying his Weekly Hubris columns is not his own, but belongs, instead, to a skilled woodworker residing in South Carolina.)