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Big Boom Theory

Is the housing market stealing away high-tech dollars?
January 1, 2006
URL: http://www.entrepreneur.com/article/81648

During the dotcom boom of the late 1990s, investors couldn't get enough of the high-tech stock sector. That is, until the bottom fell out. Since then, investors have been flocking to the red-hot housing market. But while homeownership has hit record levels, high-tech innovation may be suffering in its wake.

"In the late '90s, the economy was being propelled by a once- or twice-in-a-lifetime surge in investment in high technology," says economist Marshall J. Vest, director of the Economic and Business Research Center at the University of Arizona in Tucson. "Of course, investment in high technology improves productivity, wages, the standard of living--there's a big payback when you invest in technology. [In] the past few years, the economy [has been] driven by investment in real estate. While money has been flowing into real estate, it has not been flowing into the kinds of investments businesses undertake to make themselves more productive."

Meanwhile, a couple of financial incentives are helping drive investment dollars away from stocks and into real estate. A key change in tax law, which took effect in July 1997, made real estate investment more attractive by allowing home sellers to keep, tax-free, capital gains of up to $500,000 per couple and $250,000 for single tax filers. What's more, home buyers can deduct interest paid on mortgage loans that total up to $1 million to buy, build or improve a principal residence plus a second home.

Financial enticements alone, however, aren't responsible for the investment trend. "There's always motivation to identify what the hot new investment is," Vest says. "Recently, it's been residential real estate. In the late '80s, it was farmland. In the late '90s, of course, it was high-tech stocks. At some point, [investors] will decide there's some other [area] where money can been made."