Housing, Unemployment, and Causality

The relationship between the troubled housing market and the high level of unemployment seems pretty straightforward. With so many people out of work, the demand for housing remains weak and prices stay depressed.

What is less obvious is the impact that a poor housing market has on unemployment. The United States has always had a mobile workforce. As jobs became available in different parts of the country, workers tended to migrate there. But with so many people owning houses that are worth less than their underlying mortgage, such flexibility has been curtailed.

The Economist recently reported on findings by the International Monetary Fund: "Homeowners that are reluctant to default but unable to sell at a loss are left stuck where they are. A recent IMF paper attributes 0.5 to 1.25 percentage points of America's unemployment rate to this factor."

Besides being an interesting concept, it also points out the multi-faceted nature of causality. The ability to discern which factors impact a certain result are not always clear.

Nassim Taleb provides an excellent example of the precariousness of finding causality in his book "Fooled by Randomness." Let's say a general executes an extremely successful military campaign. The general returns home feted by his country as a genius. Yet, if you were somehow able to run a computer analysis of the general's strategy, you would find out that he used a very risky approach that would only lead to victory 10% of the time. In other words, the general was incredibly lucky, not smart.

Taleb argues that we love to see "cause and effect" where often it is only randomness. Acknowledging this idea can be helpful when it comes to investing. Take note how many times you see commentators state that an action will lead to a definite result -- thereby making a particular investment decision obvious -- yet the predicted outcome does not necessarily occur. 

This does not mean that causality does not exist. Nor does it mean that the examples given with respect to the housing market and unemployment are not true. It's just that in a complex world causality remains a murky thing. Being prepared for unexpected results is a useful mindset.

Words of Wisdom

I sold my house this week. I got a pretty good price for it, but it made my landlord mad as hell.
-- Garry Shandling