Juggling with Knives: Smart Investing in the Coming Age of Volatility by Jim Jubak

Author:Jim Jubak [Jubak, Jim]
Language: eng
Format: azw3
ISBN: 9781610394819
Publisher: PublicAffairs
Published: 2016-01-25T16:00:00+00:00

Chapter 14

Volatility Trend No. 5

Real Estate Boom and Bust and the Volatility at the Extremes

WHAT OFTEN DRIVES VOLATILITY, as I argued in the chapter on education, isn’t a significant change in the average result; rather, it is an increase in the probability that the result a single individual achieves will fall a significant distance either above or below that average. In real estate even more than in education what matters is the gain or loss at the extremes and the likelihood that your experience will wind up at an extreme.

Now that we can step back from the excitement of the real estate boom and the fear of the real estate bust, we can see that whole swaths of the real estate market weren’t caught up in the cycle. There were indeed big bulges that represent extreme results, and those bulges drove our perception of volatility. But the results for many home owners in the middle were by no means as volatile.

Why? We need to be very careful in looking at what seems to be a uniform and unified market to see exactly where the causes of volatility begin and end. What we now know about the housing boom and bust is that the cycle wasn’t something that sucked everyone in and that the results were sufficiently varied across the sector that there was the possibility of winning and losing strategies in response to the volatility. This would seem to suggest that in other cases of extreme volatility, including those that are still to come, it’s important to

•first understand what is causing the volatility,

•then map the power of those causes across the sector

•to see where those causes are operating and where they are now

•so you can devise strategies to take advantage of that volatility or find safe havens to stay away from it.

What matters most for our experience of the housing market over the next decade isn’t the volatility of the average—which is likely to change relatively slowly and relatively modestly—but instead the volatility at the extremes. The driver of housing-price volatility over the next decade or two will be determined less by the national median change of 11.5 percent in 2013 or the projected 2.1 percent national median annual change from 2015 to 2018 and more by the change in extremes at the fast-profits and big-losses ends of the barbell in places such as San Francisco and Nevada.

That doesn’t mean, however, that we need to let that perception of volatility, drawn from our reaction to variation at the extremes, determine how we react to the actual volatility across a sector or market. Sometimes fear is just fear.

Which was the better real estate investment in the recent boom-bust-recovery cycle: Miami, Florida, or Elmira in upstate New York, located in what’s called the Southern Tier, just a short distance from the Pennsylvania border and about 230 miles west of New York City?

No brainer, right? Well, no.

Elmira’s golden age was the nineteenth century when the construction of canals and railroads put the city

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