Giving In to Bubble Pressure

To paraphrase Mark Twain, everybody talks about the housing bubble, but nobody does anything about it.

Well, Mark A.R. Kleiman did something about it.

A professor of public policy at the UCLA School of Public Affairs, Kleiman, 54, announced on his weblog three weeks ago that he was, in a manner of speaking, shorting the Los Angeles housing market.

He had just accepted an offer for his 2,700-square-foot, four-bedroom Mulholland Drive home that would net him roughly a 62% gain over the price he paid in 1997 and the cost of a sizable remodeling in 2001. The deal closed last week, with the buyer acquiring a hilltop property with a picture-window view across the San Fernando Valley and a recently installed outdoor spa.


Kleiman acquired a lease on a two-bedroom apartment in Brentwood. “It doesn’t have a hot tub or much of a view,” he says, but in its favor it’s within walking distance of a couple of very fine restaurants.

Kleiman was driven to sell by three considerations: One, he had already racked up an impressive, but unrealized, gain on the property. (“I had a good ride; why be a pig?”) Two, he thought he had too much of his net worth tied up in one volatile asset. That thought alone was starting to keep him up at night, a classic manifestation of investor anxiety. Finally, the fundamentals of the housing market were telling him that the recent price rises in L.A. real estate couldn’t continue.

“Someone hired into the UCLA economics department today couldn’t afford to live in the neighborhoods where people in the same department moved 20 years ago,” he observed recently as we took in the view from his living room. Quite reasonably, he questioned whether prices could stick at a level that placed housing so far out of the reach of its principal market.

Indeed, the way home prices have outraced growth in family incomes is one of the phenomena that make housing market analysts nervous. Harvard University’s U.S. housing market study reported this year that the number of metropolitan areas nationwide where median home prices are four times the median household income or more has tripled over the last five years, with Southern California among the regions pacing the growth. Meanwhile, the percentage of home mortgages made to investors rather than owner-occupants has risen to 11% from 7%, a hint that speculation is starting to fuel home demand.


And now the Federal Reserve has begun nudging up short-term interest rates, which applies upward pressure to mortgage and other long-term rates. At a certain point, Kleiman reasons, higher rates will choke off the buyers’ enthusiasm: The monthly payment on a 30-year, $1-million mortgage at 5.5% will only pay for an $860,000 mortgage at 7%. “What if mortgages go to 9%?” he says. “I thought, do I have the courage for this?”

To be absolutely accurate, Kleiman isn’t shorting the market; with a true short position he would be risking a loss if the market kept rising -- the analogous transaction to short selling a share of stock would be for him to sell a house he had borrowed, with the intention of buying it back at a lower price and returning it to the owner, pocketing the difference. What he’s doing is more basic: moving to the sidelines.

It’s worth noting that Kleiman has more flexibility to convert his home into liquid capital than many Southland families. He’s unmarried and childless, so he didn’t have to replace his Mulholland home with one of commensurate size in a suitable school district.

That said, he knows he’s making a sacrifice. “I love this house. I went through a lot of heartache getting it redone.” He’ll miss the quiet, and his new apartment won’t have the space for his extensive collection of African art and sculpture.


Before deciding to sell, he investigated a few conventional hedging possibilities, including HedgeStreet, a website that allows individuals to speculate on economic events, and another venture that has brought together Yale University economist Robert Shiller and the Chicago Mercantile Exchange to develop derivatives in housing and other asset classes. But the trading market at HedgeStreet is still thin, and the CME project hasn’t yet gotten off the ground.

“If I could have found a Westside REIT, I could have shorted that,” he says. Eventually, he concluded that the only way to adequately hedge against a downturn was to sell the physical asset.

Kleiman is aware that the housing market could confound his expectations.

“In my dreams, we get a crunch and I put the same money back into the market for 50% more house,” he says. “The other side of the case is that it’s true that they’re not making any more land on the Westside. They’re not building any more housing, either. Gas prices and freeways could really push up demand by forcing people to live closer to their work.” He shrugs philosophically. “It will not surprise me if this house is worth 20% more in two years. I may end up with less housing than I could have afforded.”


Then there’s the contrarian factor: “The notion that this is a bubble is such conventional wisdom that I’m beginning to doubt that it is a bubble.”

But the notion that he may have sold too early doesn’t cause him as much anxiety as the idea that he might have held on until it was too late. When I called him last week on the day the sale closed, he sounded harried -- but that was because of the consequences of the sale, not its rationale.

“I’ve discovered that there’s a big disadvantage to shorting the market physically rather than financially,” he told me. “You really do have to move, and it’s moving day.”



Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at and read his previous columns at