Housing versus Business Investment

Posted by: Michael Mandel on June 24

Pursuing a theme which continues to interest me, I contrast the continued strong performance of housing construction with the weak durable goods number this morning. New orders for nondefense, nontransportation capital goods fell by 2.3% in May. Meanwhile, May housing starts are still running at an annual rate of over 2 million.

Here’s the thing—housing is much more interest-sensitive than business investment, especially spending on technology. Moreover, the expected rise in housing prices makes housing investment effectively free (or even better). To the degree to which there is a competition for capital, we would expect the housing boom to be starving other sectors.

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Reader Comments

Lord

June 24, 2005 12:42 PM

But that is just it, there is no competition for capital. Rather we are drowning in it without sufficient profitable investment opportunities, thus the low interest rates. Thank god for housing. Without it we wouldn't have an economy. The danger is that rates have little room to decline and the housing tap will eventually run dry. As we and the the rest of the industrialized nations age and become no growth to negative growth economies, the future begins to look bleak.

David Beck

June 24, 2005 03:12 PM

Is it plausible to think that capital intensive industries are moving out of the U.S.? The simplest case is moving manufacturing offshore, but maybe it's deeper than that?

Michael Mandel

June 24, 2005 05:00 PM

Lord--Going back 200 years, what you say has always been true--but only if there are no new technologies. That's what creates the profitable new investment opportunities.

Jack Krupansky

June 26, 2005 09:49 PM

I don't share this anxiety over investment since I have a stronger and deeper commitment to a free and open market economy. On a (theoretically) risk adjusted basis, housing or the mortgage-backed securities that fund them may simply look significantly more attractive than other investments, including technology.

Venture capital investment in technology companies is currently poking along at a very modest pace, but that simply reflects current demand growth and is not a forecast of where technology investment will be in a few years.

I say that we should give the markets more time to work their magic and within a year or two or three we will indeed start to see a decrease in investment in housing an an increase in technology investment.

The U.S. economy is a very big ship and simple needs an extended period of time to complete even minor maneuvers.

-- Jack Krupansky

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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